In Third Quarter, Venture Deal Size Dwindles Alongside Fundraising

(October 22, 2009) – Venture capital firms—often heavily backed by pension and endowment funds—did smaller deals, but not fewer ones, in a third quarter (Q3) marked by weak fundraising results.

According to Dow Jones VentureSource, third quarter investments by venture capital firms—often heavily backed by pension and endowment funds—were down to $5.1 billion from $5.4 billion in the second quarter (Q2) of this year. However, more deals were done in Q3 (616) than in Q2 (595), an indication that funds are still actively seeking out deals, whatever the size. The investments, however, are more likely to be in later-stage, more established companies.

The deal number figures—as opposed to deal size—also hold up well compared to Q3 2008. Although slightly down from 663 in that time frame, the number of deals holds up well next to the $3.1 billion drop in deal size, which amounts to approximately a 35% fall.

This fall in deal size is likely the result of poor fundraising results. According to the report, venture investments from limited partners are at their lowest point since 2003; only $3.5 billion was raised in Q3, and $8 billion all year. This figure is well below the $18.9 billion raised in the first nine months of 2008.

“The slow recovery we’ve seen for venture capital has faltered,” Jessica Canning, Director of Global Research for Dow Jones VentureSource, said in the report. “As liquidity and fundraising lag after the economic meltdown in 2008, investors have no choice but to keep a tight rein on investments until the industry is on more solid ground.”