Venture capital investments in U.S. companies climbed in the third quarter to more than $7.8 billion in 1,005 deals, including more than $33.9 million dollars invested in North Carolina companies.
In dollar terms, the investment total represents a 12 percent increase compared to the total invested in the second quarter when $7 billion was invested in 956 deals.
The figures come from the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association, which compiles the report based on data from Thomson Reuters. North Carolina recorded 11 venture capital deals in the third quarter; the largest was the $20.4 million haul raised by Durham-based Argos Therapeutics. Argos’ lead drug candidate is in phase III clinical trials to treat kidney cancer.
In the year to date, North Carolina has tallied 31 deals representing nearly $150 million in investment. But the investment measures lag last year’s figures for the comparable period. In the third quarter of 2012, 11 deals were done representing $44.1 million in investment. For the first nine months of 2012, 35 deals were completed representing $181.3 million in investment.
The investment picture in North Carolina looks weaker when viewed across a longer time horizon. For context, 2007 marked a high point for investments in the last decade. That year, North Carolina saw venture capitalists pump $555.4 million into 70 North Carolina companies through the third quarter. The economic downturn shrunk deal making in 2008 and 2009 but investments recovered in 2010 and 2011. But the 2013 totals through the first three quarters mark the smallest number of deals and investment dollars for North Carolina companies in the last eight years.
Impact of IPOs
The boom of initial public offerings is one factor in the smaller venture capital totals that North Carolina is seeing. This year saw IPOs from several venture-backed North Carolina companies including Raleigh medical diagnostics company LipoScience (NASDAQ:LPDX) and Morrisville-based e-commerce software company ChannelAdvisor (NYSE:ECOM). Had these businesses, both later stage companies, not gone public they likely would have turned to VCs for tens of millions of dollars to support their growth initiatives, boosting North Carolina’s venture capital investment figures in the process.
California topped all states in attracting venture capital investments in the third quarter with a total of $4.2 billion invested in California companies. Massachusetts was second with $807 million in venture capital investments. North Carolina, which has ranked previously ranked in the top 10 under this measure, fell to 18th in the third quarter.
The overall top deal in the quarter was the $257.7 million invested in Uber Technologies, a San Francisco company that provides on-demand car service via iPhone and text message. Investors in that deal were Google Ventures and TPG Capital.
In North Carolina, life science companies continue to attract the lion’s share of the venture capital investments. A total of $46.2 million has been invested in North Carolina biotech companies through the first three quarters of 2013. Software companies in the state attracted just $20.2 million in venture capital investment in that period.
Software beats biotech for VC dollars
But in the national picture, the weight of venture capital investments has shifted to software companies. Of the 11 largest investments in the quarter, nine went to software companies. The MoneyTree Report shows that the software industry in the third quarter exceeded $3 billion mark in venture capital investments for the first time in 12 years with $3.6 billion in VC investments. Software also accounted for most of the deals in the quarter with 420, a 23 percent increase compared to the number of deals done in the second quarter.
“The continued increase in valuations for innovative and disruptive technologies in software-related companies, coupled with the increase in exit activity, is driving venture capitalists to make more investments in this space,” Mark McCaffrey, global technology partner and software leader at PwC US said in a statement. “ And, at the current pace of investing, we should see total venture capital investments in 2013 exceed the annual total from 2012.”
John Taylor, head of research at the NVCA, said that more than half of the deals in the quarter came from early and seed stage deals. He added that the software sector is an increased area of investment focus given that many tech deals are less capital intensive to get to proof of concept. But Taylor balances the optimism of the increased investment against the fact that some investors have yet to find exits from previous investments. The challenge in finding exits could hold back VC firms from making new investments.
Biotechnology followed software as a “distant second,” according to the MoneyTree Report. A total of $852 million was invested in 123 deals. In dollar terms, that’s a 39 percent drop from the total biotech investments made in the second quarter. While more life science deals were done in the third quarter compared to the second, the sector is lagging in investments so far this year. In the first three quarters of 2013, venture capital firms invested in 541 life science deals marking the lowest nine month total since 2005.
