2009 a challenging year for U.S. venture capital market

11:01, December 05, 2009      

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The year 2009 has been a very challenging year for venture capital sector in the United States, and analysts are expecting a recovery for the market next year with more investment going to companies doing real business.


In the first three quarters in 2009, U.S. venture capital activity slowed significantly with 1,910 deals invested, down about 38 percent compared with the same period a year earlier, according to latest available statistics from the U.S. National Venture Capital Association (NVCA).

The country's venture capital investment totaled about 12 billion U.S. dollars in the first nine months this year, a 45-percent decrease from 22 billion dollars in the year-ago period.

The NVCA report also showed that U.S. venture capital firms raised only about 8 billion dollars in the first three quarters this year, plunging from 25 billion dollars from the same period in 2008.

"Many people wonder why venture capital activity is down so significantly. The answer has to do with the lack of an IPO (initial public offering) market," Jonathan Wu, an analyst and founder of Investech Capital, told Xinhua on Friday.

There have only been 9 U.S. venture-backed IPOs so far this year, just as bad as in 2008 when only 6 venture-backed companies went public.

In contrast, there were 86 U.S. venture-backed IPOs in 2007, according to the NVCA's statistics.

"Fewer IPOs means less money to reinvest in new funds. That means a smaller venture capital market," Wu noted.


In the gloomy market, some U.S. venture-backed companies were still successfully in securing big deals.

The biggest deal in 2009 belongs to social networking website Face book, which raised 200 million dollars from Russia's Digital Sky Technologies.

The increasingly popular micro-blogging service Twitter also raised 100 million dollars this year.

The latest example is Exact Target, a marketing e-mail software provider which recently raised another 75 million dollars, bringing the startup's total funding this year alone to 145 million dollars, technology blog Tech Crunch reported on Thursday.

"A rising tide floats all boats, but a receding tide separates the good venture capitalists from the bad ones," said Wu, who initiated and closed the series A financing for Exact Target when he was an analyst at the venture capital firm Insight Partners.

Exact Target, a part of a new generation of software companies, provides software as a service (SaaS) over the Internet, which means users do not have to install any software on their computer.

"It solved the problem of Internet businesses, where a solution did not exist. Because it is a web service, customers pay regularly every month. That is why Exact Target is so special," Wu said.


Looking ahead, Wu pictures 2010 as a year when the U.S. venture capital market recovers and e-commerce companies do well.

"We live in a world where investors are going back to basics, looking at revenues and profits as the primary adjudicators of value. Venture investors will be challenged to show exits for their existing investments," he said.

"In this environment, companies that have paying customers will be valued more highly than companies that are merely ideas. Companies that sell things online and engage in e-commerce will do well. So will companies that sell software to these companies. It helps to be a company that makes money," Wu added.

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