Venture investment slides 7% from prior quarter

Despite a drop in total capital deployed and first-time financings, experts say the effects of chaos in the financial markets won’t be felt until subsequent quarters. Cleantech enjoys an upsurge.

Venture capital firms deployed $7.1 billion in capital in the third quarter of 2008, down 7 percent from the previous quarter and down 9 percent from the same period last year.

The total number of venture-backed financings also dropped, from 1033 in the second quarter to 907 in the third, according to data compiled by the National Venture Capital Association (NVCA), PricewaterhouseCoopers and Thomson Reuters.

Although relatively modest, the decline signifies some of the mounting problems Silicon Valley has confronted in the past year. The drying up of a formerly fruitful fundraising market and a dismal exit environment have combined to force general partners to be more tight-fisted with their coffers.

The problems will likely only be compounded by the past month’s financial crisis, which the authors of the study said was not reflected in the third quarter statistics.

“If venture-backed companies can’t exit due to continued poor market conditions, venture firms will have to commit additional time and unplanned follow-on rounds of financing to those existing portfolio companies, which will channel resources away from new deals,” NVCA president Mark Heesen said in a statement that accompanied the report.

First-time financings declined 12 percent from roughly $1.7 billion in the second quarter to $1.5 billion in the third. The total number of first-time financings also dropped over the same period, from 322 to 259.

The biotech industry narrowly edged software as the leading destination for venture investments for the quarter, garnering $1.35 billion. Software companies received $1.34 billion in financing, despite having 100 more companies receive funding.

Cleantech , which the report defined as comprising alternative energy, pollution  remedies, recycling, power supplies and conservation, witnessed a 14 percent increase in investment with $1 billion going into 73 deals.

Cleantech also dominated the list of the largest financing rounds of the quarter, with five of the ten 10 largest deals coming from the sector. Southern California-based solar power plant developer SolarReserve led all companies with a whopping $140 million financing round led by Citigroup Alternative Investments and Credit Suisse.

Internationally, US-backed funding in India declined precipitously, falling 43 percent to $271 million into 28 deals. Chinese investments from US venture firms experienced a much more tempered decrease of roughly $50 million.