Venture funding up 12% in first quarter

Venture capitalists — along with the economy — seem to be perking up in 2010.

Funding for start-ups jumped 12% in the first quarter from a year earlier, when investments had plunged to their lowest level since the late 1990s.

Investors poured $4.7 billion into 597 financing deals as the economy gradually began to show signs of recovery, according to a report Saturday from Dow Jones VentureSource.

“It was a good quarter,” said Valerie Foo, a research manager with VentureSource. “We are seeing some gradual momentum. A lot more companies will probably be looking for financing, and investors will probably be willing to give.”

With no major surprises, she said, the first quarter will probably set a “good tone for the rest of the year.”

But even as the stranglehold on credit eases, analysts said financiers were still being selective with their capital.

The information technology industry improved after a difficult year and dominated in the first quarter with 192 deals pulling in $1.5 billion in funding, or one-third of total investments. But the sector used to snag the majority of the deals and has been giving up ground since 2005.

Healthcare, the next-strongest performer, dropped 21% from a year earlier to $1.2 billion.

In Southern California, the number of deals stayed flat at 61 in the first quarter, but the value of the investments jumped 22% to $693 million. The average value of the deals — $11.4 million each — was higher than in any other part of the state.

The San Francisco Bay Area featured more deals and funding overall, but its average at $9.1 million per deal was less than those for firms in Southern California.

The Los Angeles metro area was a similar story, raking in $242 million in financing, or 16% more than last year’s first quarter, with 24 deals — four fewer.

“It’s a good indicator of trust in the future of a company,” Foo said. “It’s much better than if we were to see more deals and less money going into each.”

The consumer goods sector trumped both healthcare and IT in Southern California, attracting $211 million in financing, with a hefty assist from electric car companies.

By state, California firms drew the most investments — $2.3 billion, up 17% from a year earlier, through 245 deals. The closest competitor, Massachusetts, had 62 deals worth $473 million.

Nationally, funding for renewable energy more than doubled to $338 million, claiming all but two of the deals in the energy and utilities sector. Financial institutions and services saw investments more than double to $280 million, while financing for retailers more than tripled to $38 million.

Investment in the food and beverage category — especially in firms focusing on health and nutrition products — nearly quadrupled to $60 million.

2010 is on track to exceed last year’s dreary numbers as long as start-ups continue to find healthy options for going public or being sold, ensuring a return on investment, said Michael Schoenfeld, a partner in Ernst & Young’s venture capital advisory group in Los Angeles.

But venture capitalists are still wary of newer start-ups, betting instead on more established firms that seem closer to making a profit. Later-stage deals garnered 59% of the capital invested, while seed and first-round deals grabbed just 19%.

And the median amount invested in each financing round is staying relatively stagnant at $4.5 million, up from $5 million a year earlier. As a result, analysts said, more entrepreneurs are relying on angel investors and corporate partnerships to pull through a sluggish economy.

“As an investor, you want to nurture companies that are already in your portfolio and take them to liquidity,” Foo said. “Right now, we’re not sure how investors are feeling about companies just starting up in a garage.”