During the second quarter, the state's total dollar amount — $122.3 million — decreased by nearly 21 percent, or about $32 million, compared with the same quarter last year. The number of deals also fell year-over-year from 37 to 27, according to the quarterly MoneyTree Report released Tuesday by PricewaterhouseCoopers and the National Venture Capital...
Venture-capital investments were up nationwide during the second quarter, but not in Washington state, which saw its lowest levels since recession-plagued early 2009.
During the second quarter, the state’s total dollar amount — $122.3 million — decreased by nearly 21 percent, or about $32 million, compared with the same quarter last year. The number of deals also fell year-over-year from 37 to 27, according to the quarterly MoneyTree Report released Tuesday by PricewaterhouseCoopers and the National Venture Capital Association (NVCA) with data from Thomson Reuters.
The quarter’s drop follows a 36.8 percent decline of about $67 million in the first quarter of the year, signaling that the recovery may be sluggish for entrepreneurs in Washington.
But some local VCs say the statistical backslide may be misleading.
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Greg Gottesman, managing director at Madrona Venture Group, said the numbers often are skewed because they are driven by large deals with later-stage companies. Companies in later stages have widely available products or services and are more likely to be profitable, attracting higher investments from VCs.
“The real health for the long-term is to ask whether we are having a significant number of new company formations,” Gottesman said. “And my sense is that we still are.”
Nationally, early-stage investment accounted for just over $2 billion of the country’s $7.5 billion in investment. But in Washington, more than half of the total — about $65 million — went to these companies. Early-stage companies are those that have been in business less than three years. Compared with the previous year, investment in startup companies rose by about $1 million.
Charles Porter, angel investor and professor of new-venture creation at Seattle University, said the Pacific Northwest has a greater supply of young companies than other areas in the U.S. like Austin, Texas, and the Boston corridor, which Porter said have a high number of startups as well.
“Look at the technology community we have here — Microsoft, Amazon, Google and Facebook — they’re spinning off a lot of people who start these companies,” he said.
And though startups haven’t exactly been a source of mass job creation in the economy, Porter said he expects newer companies receiving investment to grow their employee head count this year.
According to a 2010 report released by the Ewing Marion Kauffman Foundation, an entrepreneur research and education organization, one-year-old firms create nearly 1 million jobs a year, while 10-year-old firms produce only about 300,000. The report said job creation at startups has remained stable during the past few years.
John Taylor, head of research at the NVCA, said the uptick in early-stage investment is a result of VCs looking for the next generation of companies.
“It’s a function of what is in the pipeline,” he said, adding that many VCs invest based on sectors of the market.
In Seattle, sectors that brought in the most VC money were media and entertainment, with $47.6 million; software, with $24.5 million; and networking and equipment, with $14 million.
Bill McAleer, managing director at Voyager Capital in Seattle, said companies engaged in mobile-media technology — social gaming, cloud-type technologies, new online-software programs, etc. — are hot right now. Those opportunities, though, require caution, he said.
“You probably wouldn’t want to do the eighth social-media deal in a space. You want to be in there with the first or second company who already has a large market share,” McAleer said, noting that hype around social media may be causing a spike in valuation. “There’s just a lot of them out there. It’s over funded.”
On a national scale, investment in Internet-specific companies surged in the second quarter, with $2.3 billion going into 275 companies. The second quarter marks the most dollars going into Internet-specific companies in a decade, since the second quarter of 2001.
Madrona’s Gottesman said creating a healthy climate for young businesses is critical regardless of what sector they’re classified in.
“New companies grow into middle stages and ultimately into Amazon and Microsoft and big companies,” Gottesman said. “They’re fundamental for our recovery because that’s ultimately where jobs will come from.”
Christine Harvey: 206-464-3263 or firstname.lastname@example.org