Venture-capital investments declined in the third quarter both nationally and regionally, as the industry begins to feel the impact of troubled economy.

Share story

The venture-capital industry in Washington state is battling the first chilly head winds of what appears to be a rapidly cooling economy.

The amount invested in the state fell 22 percent to some $226 million in the third quarter from the same period last year, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association (NVCA).

Washington, usually among the top five recipients of venture capital ranked by state, also didn’t make the list this year, as investment in information-technology services and medical devices dropped significantly. But sectors such as biotechnology remained “robust,” said Stephen Sommerville, a partner with PricewaterhouseCoopers.

“It’s nice to see that at least a couple of the areas locally are continuing to attract investment,” he said.

In the rest of the country, investment in startups also slowed down, albeit at a slower pace. Venture-capital firms invested some $7.1 billion, down 7 percent from the same period last year. The number of deals decreased by 12 percent to 907, said the report, which is based on data provided by Thomson Reuters.

The figures invested remain within “historical norms,” but they are expected to dip over the next several quarters, the report’s sponsors said.

The third-quarter numbers don’t reflect the impact of the past few dizzying weeks of financial turmoil. But venture capitalists are already battening down the hatches as the revenues of the companies they invest in are threatened by recession, and money becomes harder to come by.

Earlier this month, one of Silicon Valley’s most prominent venture-capital firms, Sequoia Capital, summoned entrepreneurs to its headquarters for a dose of gloom and doom. A PowerPoint presentation used in the event, titled “R.I.P. Good Times,” warned that the current crisis is global and recovery will take a long time. Companies must cut jobs, save cash and expect smaller capital raises, the presentation said.

Already some Sequoia-backed companies have acted on the advice. SearchMe, a search-engine company, cut 20 percent of its work force, according to VentureBeat. AdBrite, another Sequoia-backed firm based in San Francisco, laid off 40 percent of its staff.

In Seattle, some startups are also cutting back. On Monday, Seattle-based online real-estate brokerage Redfin said it would lay off 20 percent of its workers., another local real-estate Web site, is cutting 25 percent of its staff.

“I’m a little bit more optimistic” than Sequoia, Sommervile said. “I don’t think things are going to get that bad.” He added that a relatively strong local economy could help forestall some of the worst effects of a recession, at least compared with other, hard-hit places, including the Los Angeles area, Arizona and Florida.

Belt-tightening begins

But belt-tightening has begun, he said. “There’s uncertainty about what the next 12 months are going to bring,” he said. “Companies are making sure their cost structure is in line with their revenues.”

Despite the upheaval, strong companies targeting exclusive markets should still be able to raise money, said Faysal Sohail, managing director of CMEA Ventures, a Bay Area firm. But “it may not be at the price that you like,” he added. Many early-stage startups with overlapping technologies that would be funded in normal situations probably won’t this time, he said.

And because the exit gate is blocked — going public in this time is out of the question and the credit crunch makes acquisitions more problematic — venture firms are going to spend extra time and money in sustaining late-stage startups, as opposed to funding new ones.

The financial apocalypse may even create opportunities for some entrepreneurs. Sohail thinks unemployment is going to go much higher — which means that a lot of small businesses will be created.

Other bright spots include certain sectors that continue to draw interest. “Biotech and life sciences will continue to be the leading sector,” said Jim Healy of Sofinnova Ventures, a California firm.

The industrial and energy sector, propelled by high energy costs and climate concerns, was the third-largest recipient of venture investment in the quarter. AltaRock Energy, a geothermal-energy startup with offices in Sausalito, Calif., and Seattle, raised $26 million, one of the top deals in Washington.

NVCA president Mark Heesen said clean technology will drive venture-capital investment over the coming years.

Hunkering down

Chad Waite, a managing director with Kirkland-based firm OVP Venture Partners, said his firm still sees plenty of quality deals. “Things have been fine,” he said. In early October, OVP-backed Complete Genomics of San Francisco announced its official launch amid much fanfare.

However, a reduction of spending across the economy does not bode well for many startups.

“You have to remember, fundamentally, products people invest in have to be bought somewhere,” Waite said.

Startups may eventually help bring about a recovery.

“The companies we’re starting are hopefully the shining light for this economy going forward,” Waite said. “It’s not going to be GM, Chrysler, Ford or the airlines.” In the meantime, Waite advices entrepreneurs to hunker down.

“Just make sure you’re spending your money rationally,” he said. “Try not to be cavalier in your spending.”

Ángel González: 206-515-5644 or