Washington state sees uptick in venture capital amid dismal first quarter nationally

Venture-capital investment nationwide plunged to its lowest levels since 1997, reaching just $3 billion in the first quarter of 2009, a little more than half of what was invested in the last quarter of 2008.

In Washington state, the news was not quite as grim as in other venture-capital hubs. Of the top VC markets across the country, Washington was the only one to show an increase in dollars invested compared with last quarter. Venture-capital investment totaled just over $100 million in the state, compared with $88 million in fourth-quarter 2008.

The figures were released Friday by the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters.

"In a broad sense, Washington state does have some reason for optimism," said Lucinda Stewart, managing director of OVP Venture Partners in Kirkland.

The first quarter's figure was boosted primarily by one deal — $40.2 million invested in Pathway Medical Technologies, a Kirkland company that develops devices for treating arterial diseases. Most of the remaining 21 deals were less than $10 million each.

With just 22 deals in the quarter, "that's way down from historical averages," said Stephen Sommerville, partner at PricewaterhouseCoopers in Seattle. Typical quarters in recent years saw anywhere from 35 to 45 deals, he said.

Nationwide, venture-capital investing fell 47 percent in dollars and 37 percent in the number of deals. Double-digit declines were spread across almost every industry sector, from software and Internet to life sciences and clean tech.

Clean tech, the darling of last quarter, saw investment plunge 84 percent nationwide to the lowest level since 2005. Observers said too much money had been poured into too many companies, crowding the field and raising expectations of short-term gains. "People are realizing they shouldn't just be pushing money into the sector," said Noubar Afeyan, managing partner of Flagship Ventures in Cambridge, Mass.

Seed and early-stage funding fell more than later-stage investments, a sign that venture capitalists are putting more funds into existing companies to sustain them rather than being able to take them public and move on to new ones, said John Taylor, research and financial-affairs executive at the National Venture Capital Association.

"This clearly reflects the persistence of these later-stage companies that at other times would be going public but remain in the portfolios," he said. "The IPO market is essentially shut down, and the [mergers and acquisitions] market is not strong, either."

At Madrona Venture Group in Seattle, which invested $3.4 million in two companies in the first quarter, "we continue to be active," said Managing Director Greg Gottesman. However, "we are not immune from the overall national trends. The exit markets being critical to us, the IPO window being closed for a long time and the soft M&A market ultimately affect us."

Meanwhile, nascent companies are trying to do more with less to survive the difficult times, he said. Gottesman said he expects Madrona to do "several new deals over the course of the next quarter or two."

However grim the quarterly news was, the drop in venture capital at the beginning of the decade "felt worse than it does now," said Afeyan, of Flagship Ventures.

The wounds from that bust were "self-inflicted," he said.

"This time it's not that. There's plenty of innovation," Afeyan said.

Sommerville predicted next quarter is unlikely to be much better. "I think the best we can hope for in '09 is a slight uptick in [mergers and acquisitions], with IPO markets opening more in 2010 ... maybe," he said.

"People are still nervous as to whether the worst has been uncovered yet," Sommerville said. "If unemployment rises and consumer spending doesn't rebound, companies are going to be cutting back on spending. You're in the cycle of negative sentiment breeds more negative sentiment. What we need is more positive news to start going the other way."

Kristi Heim: 206-464-2718 or kheim@seattletimes.com