U.S. News

Venture Capital Was Tight for Tech Start-Ups in ’09

Claire Cain Miller|The New York Times

Venture capitalists, whose money provides fuel to technology start-ups, last year invested the lowest amount in such companies since 1997, according to a report from PricewaterhouseCoopers and the National Venture Capital Association released on Friday.

Many in the industry say this sharp decline is healthy. Some have even been calling for a return to the investment levels of the early 1990s, before dot-com mania lured new investors and billions of dollars to venture capital and drove down returns.

“There was too much money in the system,” said Jeff Fagnan, a partner at the investment firm Atlas Venture. “It would be healthier if we can return to the pace and kind of deals that were done in the 1990s.”

That includes backing more first-time entrepreneurs and ideas coming out of universities, he said.

In 2009, venture capitalists invested $17.7 billion in 2,795 start-ups — 37 percent less cash and 30 percent fewer deals than in 2008. Internet companies, which have excited investors for more than a decade, took a big hit as investment declined 39 percent.

Only one Internet company, Twitter, was represented in the 10 biggest venture deals of 2009; it raised $100 million.

And although several of the largest deals involved so-called clean technology companies, including Solyndra, a maker of solar panels, and Silver Spring Networks, which sells energy-efficiency technology to utilities, overall investment in clean tech tumbled 52 percent.

Venture capitalists were virtually paralyzed last year. Financing of start-ups raising money for the first time fell to the lowest level since PricewaterhouseCoopers and the venture capital association started tracking venture investment in 1995. In the last three months of the year, though, investment in the youngest companies picked up slightly, giving hope to entrepreneurs.

Bryan Arp, co-founder of Netpulse, a company that makes video screens for gym equipment, started trying to raise money just before Lehman Brothers collapsed in 2008.

“A pall was cast over the Valley,” he said. “It was, ‘There’s no way. If you’re not printing money, you’re out.’ ”

He tried again in 2009, sealing a $3.1 million investment on Oct. 29 from Javelin Venture Partners and DFJ Frontier.

Mark Heesen, president of the venture capital association, attributed the fourth-quarter upturn to the improving economy.

But others say venture capital still faces problems that will be difficult to fix.

“The venture capital industry’s just lost its way, and it needs to reinvent itself,” said Roger McNamee, co-founder of Elevation Partners, a technology investment firm. “A very cynical game has developed where they make enough money off the fees to support a lovely lifestyle and they don’t have to work very hard.”

Ten-year returns for the industry have dropped to 14 percent, from 36 percent in 2000, according to Cambridge Associates, an investment adviser. There were just 13 initial public offerings and 262 sales of venture-backed companies last year, both sharp declines from previous years.

Venture investors expect the slowdown in investing to continue this year. In 2009, venture capital funds raised $15.2 billion, a 47 percent decline from the year before.