Venture Capital Sputters in the Third Quarter; Consumer Down, Business Services and Software Up

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Dow Jones is releasing its third quarter venture capital numbers today, and the amount of money raised was down sharply from last quarter’s heady $7.7 billion distributed across 740 deals.

In the third quarter of this year, 662 companies raised just $5.4 billion. It’s not uncommon to see a muted third quarter in the venture business due to summer vacations, but this was the smallest amount raised in a summer quarter since at least 2005. Unless the fourth quarter outperforms, the industry will likely wind up in the same range as 2009’s total of $23 billion raised by US companies, which is down by about 30% from recent years. That’s not surprising given the dearth of IPOs and the fact that venture firm fundraising is down too.

Still, there were few interesting surprises in the numbers.

Researchers saw a shift in investor attention away from consumer products and services and towards business and financial services. Almost as many business and financial services companies have raised money in first nine months of 2010 as did in all of 2009. Consumer goods and services, on the other hand, saw one of its weakest quarters since the recovery. Although year-over-year the numbers for consumer products and services held up, there was a sharp drop in dollars on a quarter-over-quarter basis, down from $985 million in investments in the second quarter to $621 million this quarter. The reason could be as simple as timing. Several big deals may have just closed in the second quarter and not the third. But it could indicate a frustration with rising valuations and the general frothy consumer Web mood.

The number of cleantech and healthcare deals was pretty steady but, in terms of dollars, it’s a different story. Healthcare has been weak this year, but energy and utilities have surged. Year-to-date dollars going into energy companies are up a huge 47% to nearly $2 billion.

There was also a 26% uptick in the amount of money going to software companies– a cool $1 billion this quarter. “Software” is an inherently broad category, but it has historically been the venture industry’s largest and most consistently profitable one.

It’s a ho-hum quarter overall, but there are seeds of cleantech delivering on its promise, a new generation of enterprise companies and a meaningful disruption of the finance-industry. At a minimum, these numbers show that more entrepreneurs and VCs want there to be.

On a can’t-we-all-just-get-along note, the survey found that there was an increase in venture capital firms and angels doing deals together so far, year-to-date, although to be fair it’s a small $282 million in co-investment out of some $18 billion raised so far in 2010. Returns may be a different matter for this generation of funds, but in terms of money flowing out, this is still a VC’s business.

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