Venture capital investment dropped sharply in North Carolina in the third quarter to just over $52 million, far lower than the $100 million range from the first two quarters of the year, but the number of deals increased as did the amount of funding for early-stage and startup companies.
The North Carolina statistics reflected national totals and trends.
“The number of deals is up, and even though the amount of money is down, the increase in deals is to me good news,” said Laura Hoke of PricewaterhouseCoopers in Raleigh, which teamed with the National Venture Capital Association to compile the latest statistics based on data from Thomson Reuters.
“With more money going to early stage, startups and expansion rounds, that’s good news for entrepreneurs,” she added.
VCs invested more money in more U.S. startups in the third quarter than they did a year earlier — especially in the software industry.
Compared with the previous quarter, however, nationally there were declines in both the amount of money invested and the number of deals made. This suggests that investors may be getting more cautious about the economy and the volatile stock market, which has caused many companies to hold off on going public — when many venture capitalists get their payoff.
According to a study out Wednesday, startup investments rose 31 percent in the July-September period, to $6.95 billion from $5.31 billion a year earlier. Compared with the second quarter of this year, venture capital investments declined 12 percent from $7.88 billion.
In North Carolina, 14 firms drew some $52 million in investment.
Of those, 10 deals were made in the Triangle and four were made in Charlotte – a surprisingly strong showing for the Queen City.
Seven deals were early stage, seed or second round investments.
Unlike the two previous quarters, there was not one major deal of $45 million or more to life North Carolina’s total investment toward triple figures. As a result, North Carolina fell to 17th among the states for funding. Typically, North Carolina ranks in the top 10.
Clinical research firm Clinipace in Morrisville landed the largest deal at $15 million.
Biotech firm Metabolon ranked second at $13.1 million.
The National Picture
Nationally, the money in the latest quarter was split among 876 startups — up 3 percent from last year, but down 14 percent from the second quarter.
“Given the tremendous impact that venture capital has on company creation, it is easy to forget that our industry is small and highly susceptible to the many market forces presently at work,” said Mark Heesen, president of the NVCA.
“Public policy challenges in the life sciences and clean technology sectors are impacting investment levels this quarter as is the IPO market that basically came to a screeching halt in August. Venture fundraising levels are the lowest they have been in nearly a decade so it is reasonable to expect investment levels to decline in the coming years.
“Yet despite the challenges, the industry continues to fund new companies because history has shown us that innovation always prevails and there remains significant promise across all industry sectors for these emerging growth companies,” he added.
The software industry received the highest level of funding, with $2 billion invested during the quarter. That is up 23 percent from the second quarter and represents the highest quarterly investment in the sector in nearly a decade, according to the study.
Biotech Sector Takes a Hit
The biotechnology industry was in second place in terms of dollars invested, with $1.1 billion. That’s down 18 percent from the previous quarter. Part of the reason was the difficult and unpredictable nature of the approval process at the Food and Drug Administration, said Tracy Lefteroff, global managing partner of PricewaterhouseCoopers’ venture capital practice.
“Challenges in the regulatory environment for Life Sciences companies are prompting VCs to look to other industries to put their money to work for a faster return on their investment as indicated by the notable increase in Software investments,” Lefteroff said.
“Accordingly, over the past two quarters, we’ve seen a clear shift in Life Sciences investments from Seed/Early Stage companies over to more Later Stage companies.
“VCs are continuing to support the companies in their pipeline but appear to be curbing their investments in new Life Sciences companies,” she added. “Despite the dip in Life Sciences and in the overall investment total for Q3, 2011 is still on track to exceed the $23.3 billion invested in all of 2010.”
The software industry received the highest level of funding, with $2 billion invested during the quarter. That is up 23 percent from the second quarter and represents the highest quarterly investment in the sector in nearly a decade, according to the study.
Online deals site Groupon Inc. filed its initial IPO papers in June, but it still hasn’t made its public debut. After a strong start to the year, IPOs slowed down considerably in August, with companies withdrawing at a pace not seen since December 2008.
Average Deal Size Fluctuates
Forty-nine percent of the money invested went to companies at the early or the even earlier “seed” stage of funding. The average seed deal was $2 million, down from $3.3 million in the second quarter, and the average early stage deal was $5.7 million, down slightly from $5.8 million.
The average “expansion” stage deal was $9.6 million, up slightly from the prior quarter. The average later stage deal was $12.5 million. That is up from $11 million in the previous quarter and represents the largest average deal size for this stage in a decade.
Among companies, Reata Pharmaceuticals Inc. got the largest investment of the quarter, $300 million. Founded in 2002, the company develops oral anti-inflammatory drugs. Cvent Inc., a provider of Web-based software for the event-planning industry, came in at second place with $136 million. Airbnb Inc., an online community that connects travelers with people renting out their homes, raised $112 million.
Tumblr Inc., which runs an online publishing system, and HelioVolt Corp., a maker of thin-film solar products, each raised $85 million.
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