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Venture Capital Funding Disappearing -- Will It Come Back?

Posted by: John Tozzi on April 20, 2009

Venture capital investments dropped to the lowest level since 1997 in the first quarter, with just $3 billion invested, according to the MoneyTree report from PricewaterhouseCoopers and the National Venture Capital Association, based on Thomson-Reuters data. That’s a down 61% in venture dollars invested from the first quarter of 2008, and a 47% decline from the amount invested in the fourth quarter of 2008, which itself was much lower than the rest of 2008. This reinforces what most entrepreneurs already understand: bootstrapping is more important than ever.

Here’s the question: is this decrease in VC investment a dip or a drop? That is, does it signal a long-term contraction of venture funding, or a temporary decline that will recover in tandem with the broader economy? The NVCA calls a bottom with a slow recovery ahead. Marc Heesen, the group’ president, says in the release:

While this drop in investment is significant, we are not forecasting levels to continue to fall further. We would expect a mild and steady increase in investment throughout the rest of the year, particularly if the exit pipeline is allowed to clear.

Not everyone is so sure. From GigaOm:

Some have argued that venture firms should be pouring between $10 billion and $15 billion into startups each year, not the annual average of $26.51 billion invested over the last five years, or last year’s total of $28.3 billion.

Among the hardest areas hit was clean tech, where dollars invested dropped 84 percent, from $971 million in Q4 2008 to $154 million. The amounts invested in health care services, business products and services, and financial services all grew from the prior quarter. Venture money also continues to move downstream to later stage companies. Again, entrepreneurs angling for VC need to know that now more than ever, they need to show traction — few people are in the business of funding concepts right now.

More analysis from VentureBeat and Dow Jones, which tracks the industry separately and has different numbers but the same conclusion.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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