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Venture Capital Funding Slows in the First Quarter: Report

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Venture capital investment dollars declined 12 percent in the first quarter of 2013 from the previous quarter, and the number of completed deals slid 15 percent, according to a report released today by PricewaterhouseCoopers and the National Venture Capital Association.

Venture capitalists invested a total of $5.9 billion in 863 deals in the first quarter, compared with $6.7 billion in 1,013 deals in the fourth quarter of 2012.

The decline is consistent with industry expectations. For the past several years, the venture capital industry has been raising less capital than it invests, accounting for some of the slowdown. Less money is also being funneled into traditionally capital-intensive sectors such as clean tech and life sciences, especially in first-time deals. What's more, the majority of deals are taking place in the capital-efficient IT sector where funding round amounts are lower, according to the report.

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Select Sector Investment Declines

During the first quarter, software companies received more VC funding than other sectors, accounting for $2.3 billion, or nearly 40 percent, and 329 of the deals. The increase in funding in the software space is "very pleasantly surprising" given the drop-off in funding overall, says Tracy Lefteroff, a global managing partner of the U.S. venture capital practice at PricewaterhouseCoopers. This is the fourth consecutive quarter of more than $2 billion invested in the sector.

Unlike software, several sectors tracked in the report saw notable investment declines. The life sciences sector, which includes biotech and medical device businesses, fell 28 percent in dollars and 23 percent in deals. The clean tech sector, which includes alternative energy and conservation companies, declined 35 percent in dollars and 13 percent in deals from the prior quarter.

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Angel Capital

While overall venture capital investing has declined, it's not necessarily a harbinger of bad news for startups. There's still plenty of angel capital around, and historically less than 1 percent of U.S. companies have raised capital from VCs, according to the Ewing Marion Kauffman Foundation, a Kansas City, Mo.-based organization that seeks to advance education and entrepreneurship.

"You're seeing more and more angels stepping up to the plate on a percentage basis compared with venture capitalists," says Lefteroff.

Concrete data for angel investing tends to be harder to come by, given the private nature of many of the deals. According to the Halo Report, a national survey of angel group investment activity, angel investing remained stable in 2012, compared with prior years.

Editor's Note: Learn from a panel of experts and entrepreneurs who have successfully financed their own ventures and are helping others do it at the Thought Leaders Live 2013 event May 29, in Long Beach, Calif. Event and ticket information can be found here.

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