"Venture capital investment plummets in Q1 2009 to 12-year low"

Now, you may read a lot of doom-and-gloom headlines. Our headline is more like, "The dog did not bark". Yes, we know that does not sell newspapers! Read on, though, if you want to go beneath the headlines and see what is happening in web technology investing.

We have been interviewing investors every week for the last 2 months, and been tracking Series A deals since October 2008 ("meltdown month"). On both scores, we are seeing signs to be at least cautiously optimistic. The data we get is mostly anecdotal, so we wanted to see how this compared to the rigorously compiled data from MoneyTree.

Neither Boom nor Bust

That is the headline. Boring, huh?

The MoneyTree data is all about VC investment in America. That is, only in America. It does not record deals done in Europe or Asia. But it does record deals in all fields -- biotech, clean tech, etc. -- and all stages, from early to late.

What interests us at ReadWriteWeb is the small subset that is (a) seed- and early-stage, and (b) Internet-specific. So we drilled into those numbers. Q1 2009 saw 34 deals, with a total of $138 million invested. Is that good or bad? Well, 34 companies getting their first investment round is one helluva celebration for 34 entrepreneurs, their teams, and their investors. Every one of those has high and reasonable hopes of becoming a big and successful company. So take a moment to celebrate with them.

But those numbers are down from 55 deals worth $196 million in Q4 2008 (presumably, the deals closed before the financial meltdown but were executed and recorded afterward). In Q3 2008, there were 80 deals worth $286 million. So, the trend is down. But you did not need me to tell you that, right?

Remembering Booms and Busts in Cold Numbers

When you look at the charts, you see the insane spikes in 1999 and Q1 2000. How about 486 deals worth $4,533 million in Q1 2000? Yes, that is 486 ventures that got their first round funding in those 3 months!

Obviously, we will never see that again. Nor should we want to. There was a horrible destruction of capital, and those who worked through it called it the technology nuclear winter because of the loss of confidence it bred for years. How about 15 deals worth $76 million in Q2 2003? That was actually the lowest in the 53 quarters tracked by MoneyTree.

If you want to be positive, then, our position now is twice as good as it was in Q2 2003. So here is an alternative headline:

"VC investment in Internet startups is up 100% from last downturn".

Sounds good, but only goes to prove that headlines are just... headlines. What will really happen next quarter and the rest of the year? That is, have we reached the bottom?

Have We Reached the Bottom?

That is the question investors always ask in the stock market. But how about in the web technology innovation business that we report on for ReadWriteWeb: have we hit bottom? The investors we speak to are bullish and give good reasons for their bullishness. But if we are going to repeat the trend lines of the last cycle, we should be worried. Here is why...

The dot-com bubble noticeably burst in March 2000. Anybody paying attention could see that "it was over." That was like October 2008, clearly a transition. But it took another 12 quarters before early-stage Internet financing hit rock bottom, in Q3 2003. If we follow that trajectory, we are in for a world of pain. But investors have been giving us all kinds of reasons why we will not follow that trajectory. The most obvious reason is that the boom period in Internet deals in this cycle is way, way lower than it was in the last cycle:

• Q1 2000 - $4,533 million
• Q4 2007 - $434 million

That's right. This boom cycle at its peak is 90% lower than it was in the last cycle. So we don't have as far to fall. Phew!

At least we'll know next quarter. But then, analysts always say that, don't they? "Wait and see."

Here We Are in Q4 2004

How was business for you in Q4 2004? Because that was the last time we had comparable amounts of money invested in early-stage Internet ventures:

• Q1 2009 - $138 million
• Q4 2004 - $141 million

So What Did Fall Off A Cliff?

Clean tech fell off. Total clean tech dollars invested:

• Q4 2008 - $1,141 million
• Q1 2009 - $154 million

(That includes all stages, not just early-stage.)

Yep, that is right. The clean-tech revolution that you've read about? Ouch! Just about $1 billion less invested in this quarter. Hm, did crashing oil prices have anything to do with that, and have we seen this movie before? But we digress...

What Are Investors Telling You?

Investors have been telling us what they think. We have been tracking Series A deals to get a sense of what is actually happening. What are you seeing? Have investors gotten slower or more cautious?

1. The average deal size is increasing. The average went from $2.12 million in November to $4.11 million in December to $6.06 million in January.
2. California still rules, but global investment is happening. In the US, venture capital is still dominated by Silicon Valley, but we are seeing a few more global deals, specifically in the UK, Canada, and English-speaking India.
3. Total diversity was apparent, without any market-segment bias. This is a good sign that ventures are being evaluated on the fundamentals rather than on what's hot.

Which Ventures Received Money?

December:

• NetShelter
• dotblu
• InnerRewards
• KZOInnovations
• smartfundit
• Appcelerator
• Wordstream

January:

• HubDub
• Sittercity
• Appnomic
• CloudSwitch
• GoInternetMedia

Which VCs Wired the Money?

December:

• Rho Canada
• GrowthWorks Canadian Fund
• JLA Ventures.
• DE Shaw, Maple Investments
• Valhalla Partners
• Baytech Venture Capital
• Storm Ventures
• Sigma Partners

January:

• Pentech Ventures
• Apex Venture Partners
• Norwest Venture Partners
• Atlas Ventures
• Matrix Partners
• Kennet Partners

However, we've also lowered our cut-off to $0.5 million. Tougher times lead to smaller rounds, which is not necessarily a bad thing because tough times force you to do more with less money. This got our list up to nine deals in total for November.

Below, we have linked each company's name to its entry in the Trade Vibes-powered ReadWriteWeb Company Index (or to the company site if there is no entry). You can use this as a starting point for research and comparison, referring to the venture's own site when needed.

• Machinima
• CarWhale
• Maxplore
• Open Candy
• Zuberance
• Carbon Flow
• Casual Collective

Note: a commenter pointed out that in our original A-Team post we missed Siri, which raised $8.5 million in October, although we have written about them before.

So please tell us who we missed in November. We will correct it in December.

Which VCs Are Wiring The Cash?

We identify only the lead VC in the following list (assuming that the first one listed in the PR material is the lead). We aim to make this more in-depth next month by showing all of the VCs that participated.

• Pond Venture Partners
• MK Capital
• Sierra Ventures
• Emergence Capital Partners
• Bessemer Venture Partners: check out its Anti-Portfolio.
• Clean Pacific Ventures
• Lightspeed Venture Partners: it has one of the best blogs in the venture business.

Emergence Capital Partners did two Series A deals in November (Maxplore and Zuberance). That is pretty cool.

If you want to talk to the firm, here are the basics:

Investment categories:

• Software-as-a-Service (SaaS)
• Consumer services
• Digital and social media
• Information services
• Business services
• Cloud computing

Investment criteria:

• Early and growth stage
• Compelling customer value proposition
• Market leadership potential
• Experienced and passionate management team
• $1 to $10 million initial investment
• US preferred

Emergence is riding the enterprise SaaS wave. Most VCs missed that wave, as we found when we surveyed gritty entrepreneurs. That sector was out of favor at the time, and most ventures simply did not get VC funding then.

Where Are Ventures Getting Funded?

It looks like California is still doing the dreaming, with six out of the eight ventures residing there. The other two are from outside the USA: one from England and the other from India.

Which Sectors Are Getting Funded?

The biggest theme was video, specifically games, but there were also two that had a green focus.

Here's hoping that December will be an even better month.

• A minimum of $1 million. We don't want $50,000 financing being called Series A. Sorry, no grade inflation here.
• Lead Institutional VC. There are plenty of other very good types of financing. We celebrate bootstrappers in our Gritty Entrepreneurs series. Angels are wonderful, and we all love friends and family. But this series is about the classic VC fund, the core of the start-up financing world. We only report the lead VC because that is what matters: with a good lead there is never a shortage of followers.
• Reported data. We need to see the dollar amount and the lead VC publicly reported. No "unreported sum" or "undisclosed investors." If you want to be stealthy, you don't need any visibility, which is fine.
• Web technology only. We are seeing a lot in alternative energy, biotech, and other sectors, which is all very interesting, but not what we do at ReadWriteWeb.
• Series A only. We recognize that getting Series B or C financing is important as well, but it is hard to see from public data whether these are really positive events or not. During a downturn, many of them, sadly, will be down rounds that protect VC capital but, because of onerous preference terms, often leave the entrepreneurs with very little. We don't want to celebrate something only to find it is viewed as negative by the participants. But everybody can celebrate a Series A: it speaks of optimism, new trends, and a go-for-it spirit.

The Heroes And their Partners

We believe that entrepreneurs are the heroes, but we also really want to celebrate their partners, the VC guys who have the guts to go against the trend and back them during tough times. All VCs talk the talk, which is that this is a great time for investing. We want to report on the ones who actually walk the walk as well. There is only one way to get into this list: close a Series A round and wire the money.

We want to use this to learn about changes in the VC business and so that entrepreneurs can see who is actually doing deals today.

Our A-Team Series Starts in October

October 2008 was a unique month for anybody in the business world. The word that kept dropping from the lips of even the most experienced been-there, done-that kind of person was "unprecedented." These are not normal times. And October was certainly not a normal month.

So, the October list was pretty short. We have heard plenty of stories from entrepreneurs about deals that were agreed on and in the final legal phase but that got pulled in September and October. We did not track September because the worst and final phase of the crash kicked in mid-September, and deals were still being done in the early days of September. So, October was the first full month of the new reality.

We count from the date when the deal was announced. But we recognize that the contract may have been signed some weeks before then.

Enough Preamble. What Deals Were Done?

Oops! Using our strict criteria, only one deal was done in October. We saw some that came close. We saw a seed round of $225,000 for a game company called Kirkland North from a venture fund called Harrison Meta Capital. We saw a Series B for $4.5 million coming from RRE Ventures to our good friends at Adaptive Blue. We saw an Israeli company called CogniSafe getting an undisclosed seed round from 21 VCs.

The one deal that squeaked into October was Zimbio with a $6.8 million Series A from DFJ and Menlo Ventures. The deal was announced on September 30th. So it is entirely possible (indeed probable) that this contract was signed before our official Meltdown Day. But the deal got done, and that is what matters.

Zimbio has very few facts on its "About Us" page. TradeVibes at least has a CEO listed; so we tracked down Anthony Mamone, and the data was sparse, not even a LinkedIn profile. All we found was a sketchy profile on Link Silicon Valley.

A Special Cheer for Syncplicity and True Ventures

The deal that kicked off the A-Team series and gave us the idea for it was the one with Syncplicity with its $2.35 million Series A funding from True Ventures. So we went to meet Leonard Chung, CEO, at True Venture's offices in San Francisco. True Venture's open-plan offices on Pier 38 do not look like classic VC, and that is probably the point. Phil Black of True Ventures made the point that ever-increasing fund sizes were taking VC away from its entrepreneurial start-up roots.

Then we noticed that our friends at GigaOm have their offices right next door. No coincidence as it happens, True Ventures was the lead investor in their Series A funding. So, True Ventures is a founding member of our A-Team. Take your best venture to them!

We have not had time to fully review Syncplicity yet. We promise to do so soon. So, in the meantime, we will fall back on the journalistic standby, quoting from its site:

"Everyday sync, backup, and sharing as simple as can be. The only all-in-one service that makes sure your files are everywhere you need them."

That is a crowded space. But so was search when Google entered the market. Getting an A round done in today's market makes one think they must have done something right, so we will check them out and urge you to do the same.

Good News from a November Sneak Peek

Here is the good news. Taking a sneak peek at November, around the middle of the month, we already see quite a few Series A deals that meet all of our criteria. We will tell all in our A-Team report in early December.

Who did we miss in October? (No spam please; look at the qualifying rules above.)