VC Spending Slumps in 3Q But Software Still On Top

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Venture capital spending took a precipitous dip in the third quarter but software startups focused on cloud computing, social media and wireless apps received the most funding of any industry sector, according to the MoneyTree Report from PriceWaterhouseCoopers and the National Venture Capital Association (NVCA).

Total venture capital investments tumbled to $4.8 billion in the third quarter, down a staggering 31 percent from the second quarter when firms pumped $6.9 billion in seed money into a total of 692 deals, according to data compiledfrom VC outlets across the U.S.

Software startups managed to snare more than $1 billion, or 21 percent of all VC funding, outpacing the biotechnology ($944 million) and medical device and equipment ($572 million) for the top spot by industry.

Still, the software sector regressed 13 percent in total dollars invested and 21 percent in total deals (190 rounds vs. 242 rounds) compared to the second quarter, a clear indication that the choppy economy still has even some of the biggest VC firms in the world holding back their bankrollseven though demand for niche software apps — particular on the mobile and social networking fronts — continues to soar.

“Despite investment declines, there are reassuring signs of stability in the third quarter numbers,” NVCA President Mark Heesen, said in the report. “Cloud computing, social media and security continue to show tremendous promise on the IT side while medical advances abound in biotechnology and medical device fields.”

Despite the overall decline in VC spending and the marked dip for software startups as a group, the funding levels represented a distinct improvement from the year-ago quarter when investments in software companies checked in at a relatively paltry $622 million, ranking behind both biotech and clean technology firms.

VCs place smaller bets on more startups

One of the companies that garnered the most cash in this decidedly tepid quarter was Trilliant Inc., a Redwood City, Calif.-based developer of wireless network and grid management applications. It pocketed $106 million, or the roughly 10 percent of the $1 billion invested in all software companies, from a variety of VCs including Investor Growth Capital Inc., VantagePoint Venture Partners and Zouk Ventures, Ltd.

Palo Alto, Calif.-based Jive Software tied for second on the most-funded software list in the quarter, raking in a total of $30 millionthat the developer of social customer relationship management (CRM) software plans to use to further strengthen its leadership position in this burgeoning market. According to Gartner, Jive recorded sales of roughly $30 million last year, a 85 percent surge from the prior year.

Aster Data Systems of San Carlos, Calif. also pulled in $30 million in much-needed seed money that it will use to further develop clustered database applications for Web analytics and business intelligence.

Power Assure Inc., which makes energy management software, shopkick Inc., which develops a variety of applications for Apple’s iPhone, each garnered $15 million in funding this quarter. Cloud-computing upstart Nimbula Inc., Pixazza Inc., an e-commerce platform developer, and YouSendIt Inc., a which develops digital content deliver software, also pocketed $15 million apiece.

While most of the big-dollar deals in the software sector were late-stage contributions, a slew of smaller investments in the range of $1 million to $10 million were bestowed on neophyte firms receiving their first significant cash infusions.

“What is even more reassuring is that first time financings are holding strong, evidencing that venture investors are making a steady stream of new bets and filling the innovation pipeline, driving our industry and our future economy,” Heesen added.

No industry took a bigger nosedive in the third quarter than the clean technology sector, which watched total VC investment plummet from $1.5 billion in the second quarter to $625 million, a 59 percent free fall.

Biotech companies garnered the second-most funding in the quarter at $944 million followed by medical device and equipment vendors, which scooped up more than $573 million.

PWC and the NVCA, which represents more than 400 venture capital firms in the U.S., teamed up on the report and will release the fourth quarter figures sometime in January.

Larry Barrett is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.