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Why Did VC Investment Fall Off a Cliff?

Burning Money
CNBC.com
Burning Money

Wall Street is about to welcome its biggest venture capital-backed IPO ever. And it seems like every week we see another VC-backed company go public and the stock soars — most recently, Splunk stock jumped 109 after going public. With such profitable exits, one would expect venture investors to clamor to pour money into startups. But in fact, the opposite is the case — venture capital investing fell off a cliff in the first quarter. The amount of venture capital invested dropped 18 percent and the number of deals declined 9 percent in the U.S. in the first quarter from last year, according to Dow Jones VentureSource.

What happened?

The median amount invested in a financing round fell 13 percent to $4 million. The big surprise, considering the successful IPOs of consumer Internet companies like LinkedIn and Zynga, is that investment in consumer Internet companies suffered the most. Investment in the sector that includes social media, entertainment and shopping services like Groupon and Gilt Group, fell a whopping 76 percent while deals fell 17 percent.

To be fair, the comparisons to last year for that key consumer Internet sector are quite tough. A year ago, the investment totals were bolstered by large investments into Zynga and LivingSocial —those two companies alone together raised $870 million.

Companies like Facebook, Zynga, and Groupon drew billions in venture investment over the past few years—and now they’re mature and have either gone public or are about to. The big question is whether venture investors turn their attention to a new group of startups, with similar aspirations to take them public down the line. The improvement in the public markets—and the opportunity to exit VC investments—could lead to a spike in financings.

But angel and venture investors keep telling me that the bar is higher than ever. Unlike the Internet boom a decade ago, they’re making sure that their investments have the fundamentals—like revenue and (eventually) profit—to justify a massive sale or an IPO. And I hear that startups don’t need as much money as they used to, to get a business up and running and prove a model.

So where was the growth last quarter? The IT industry was the one sector that saw both deals and investment increase. Software accounted for the largest proportion of IT deals, as this group of companies raised 14 percent more capital with 2 percent more deals.

Questions? Comments? MediaMoney@cnbc.com

  • Working from Los Angeles, Boorstin is CNBC's media and entertainment reporter and editor of CNBC.com's Media Money section.