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Venture Capitalists Trim Investments As IPOs Dry Up

The MoneyTree survey reports that the fourth-quarter plunge in VC investments was enough to pull down investment figures for the entire year.
Venture capital investors gamely continued their investing in 2008 but finally began to throw in the towel during the fourth quarter as the overall economy deteriorated, essentially shutting off their all-important exit vehicle -- the initial public offering.

According to the MoneyTree survey of venture capital investments, the fourth-quarter plunge was enough to pull down investment figures for the entire year. Investments dropped 8.4% for the year to $28.3 billion from $30.9 billion for the previous year. VCs invested $5.4 billion in U.S. companies in the fourth quarter -- a 33.2% drop from their investments made in the fourth quarter of 2007. The drop in VC investments was the first decline in annual venture investments since 2003.

Computer software startups continued to nail down the largest share of investments -- $4.9 billion -- last year as the sector held onto its position as the top VC investment-getter.

PricewaterhouseCoopers and the National Venture Capital Association sponsor the quarterly MoneyTree report from data provided by Thomson Reuters.

While most of the report tracked the gloomy figures and trends of the U.S. economy, the MoneyTree report did have one major positive aspect -- investments in clean energy surged more than 50% during 2008. The sector continues to be attractive as President Obama’s stimulus package augers increased government spending for a slew of alternative energy programs, including solar and wind technologies. Solyndra, of Fremont, Calif., received $219.3 million in venture funding last year in the largest VC deal in the United States. The company designs advanced solar photovoltaic technology.

The classic venture capital cycle has been interrupted in recent months as the market for IPOs has dried up, depriving VCs of their traditional way to cash out of their older investments and replenish their pots to invest in new entrepreneurial ventures.

Particularly hard hit in the fourth quarter of 2008 were the New England states. VC investments there declined 23.3% to $732 million from the previous year's fourth quarter.