1Q venture capital investments dip 5 percent to $7.1 bln

This was the first year-over-year decline in the venture capital industry’s quarterly investments since the end of 2005, based on data to be released Monday by the National Venture Capital Association, PricewaterhouseCoopers and Thomson Reuters.

In last years first quarter, venture capitalists invested $7.5 billion. Despite the decline, the $7.1 billion invested during this year’s first quarter was the fifth-largest amount in a single quarter since 2001.

Although there were fewer dollars disbursed by venture capitalists, more deals got done in this year’s first quarter than last years - a total of 922 compared with 861 last year.

The first quarters smaller average deal size - $7.7 million, down from $8.8 million - could mean the entrepreneurs whose ideas were funded did not need as much money or it could reflect greater caution among venture capitalists.

For now, industry officials are confident investment will pick up in the months ahead. The January-March period usually is the slowest time of the year for venture capital deals.

"We do not expect to see significant declines in investment levels in the coming year," said Mark Heesen, president of the National Venture Capital Association.

Because they expect to have to nurture startups for three to five years, venture capitalists generally are not as worried about short-term economic turbulence as many other classes of investors are, said Nina Saberi, managing general partner of Castile Ventures in Waltham, Massachusetts. "The effect (of a poor economy) is milder than you might imagine," she said.

But the enthusiasm of venture capitalists could still be dampened, especially if they continue to have as much trouble cashing out of their investments as they did in the first quarter this year.

Only 56 venture-backed startups were sold during the first three months of the year, the lowest volume in a decade.

Making an initial public offering of stock proved to be even more daunting than selling a startup, with just five venture-backed companies making their market debuts in the quarter. That’s a potential problem because venture capitalists count on IPO’s and buyouts to make money off their investments. If those exits remain closed, venture capitalists may become more likely to hold off on locking up more of their funds until they see signs of a turnaround.

"We are not completely immune from the rest of the world," said venture capitalist James Thomas of Thomas, McNerney & Partners in Stamford, Connecticut.

For now, venture capitalists still have plenty of money to throw around, having raised $6.3 billion for future investments in the first quarter. They hauled in nearly $68 billion during 2006 and 2007 combined.

As usual, in the first quarter, venture capitalists put most of their money into the technology sector. Internet companies attracted $1.31 billion, an uptick from $1.29 billion in the same period last year. Venture capitalists have invested at least $1 billion in Internet startups in six of the last seven quarters.

Biotechnology picked up $1.27 billion in venture capital in the first quarter, a 17 percent declined from $1.53 billion last year. Venture capitalists have invested at least $1 billion in the biotech sector for eight consecutive quarters.