Venture Funding Declines by 16%

The healthcare industry is not proving to be as popular with venture capitalists this year as it was in 2004, according to a report being released today.

Investments in healthcare companies declined 39% in the first quarter from the same period a year ago, contributing to an overall drop in venture capital outlays this year, data trackers Ernst & Young and VentureOne said.

Overall, 474 companies received $4.6 billion from U.S. venture capital funds in the first quarter -- 16% less than was invested in about 520 transactions last year.

The investment downturn was even worse in Southern California, according to the report, which is issued quarterly. Venture investors put up $371 million for 34 deals during the quarter, a 40% decline from the same period last year.

The report noted that the downturn in Southern California and nationwide was consistent with the first-quarter declines in each of the last five years. During the first quarter, the report noted, venture capitalists tend to focus less on investments and more on administrative duties and fundraising.

One bright spot within information technology was communications. Reversing a decline in the last half of 2004, 68 companies in the sector, which includes wireless technologies, received $605.2 million in the quarter. That’s up from last year’s fourth quarter, when 42 companies received funding.

Venture investors put more money into start-ups than in any period since the fourth quarter of 2000.

“Continued strength in early-stage rounds reflects the positive company-formation environment that we see on the ground in Silicon Valley and other hotbeds,” said Robb Browne, leader of the Venture Capital Advisory Group in the Silicon Valley office of Ernst & Young.

Investments in software companies rose 4% to $1.23 billion during the quarter. The largest investment was $108 million in Webroot Software, a Boulder, Colo.-based provider of anti-spyware and privacy protection software.

The report said investments in healthcare abated during the quarter as biopharmaceutical companies received half as much money as they did a year ago. A wave of initial public offerings in late 2003 and early 2004 led to a surge of investment in biopharmaceuticals last year, the report said.