Venture capitalists shrugged off market turmoil, economic uncertainty and their own difficulties raising funds from limited partners and opened their checkbooks (a lot) in Q3 2011 showering 790 firms with $7.9B of funding.

The entire 61 page Q3 2011 quarterly venture capital activity report is available for free at the bottom of this research brief

Of course, the looming question after seeing this type of blowout quarter is whether or rather how long this can continue given VCs are having a tough time raising funds. If the final quarter of the year comes in at similar levels, we are looking at a $30B+ year for VCs which depending on final tallies could represent the highest level seen in the last decade. So at some point, something has to give. But until then, entrepreneurs can enjoy the VCs for however long they choose to “make it rain”.

 

Before we get into specific notes on the quarter, it’s worth noting what we included and what we didn’t in the numbers as this quarter had some mega-deals which can and did greatly impact results. For example, the CB Insights database tracked Twitter’s $800M funding but only $400M is included in our data (as the other $400M was used to cash out existing investors). Also, when non-VCs (mutual funds, hedge funds, etc) invest in internet companies for example, we do not include those rounds unless there is also a venture firm participating in the round as well. As always, we recommend you also review our definitions and methodology on p. 59 of the report to see what is included vs. what is not as there tends to be a fair amount of misinformation out there about venture data.

Did NY Just Win the Race for #2 in VC?

In Q3 2011, NY schooled Massachusetts with both deals and dollars jumping to record levels while Massachusetts dipped on both dimensions. For the first time ever, NY beat Mass on an absolute basis for both venture capital deals and dollars invested in a quarter. NY registered $831M invested over 86 deals while Mass came in at $710M invested over 83 deals.
 

VCs Continue to Plant Their Seeds – Optionality Rules

The Seed VC phenomena which we’d uncovered and detailed many quarters ago continues to gain steam with 15% of the quarter’s deals going to seed investments. While primarily a tech VC style of investment, healthcare investors increasingly used Seed VC investments in Q3 2011 as well. The Seed VC investment gives investors a relatively low-cost option on companies they invest in. In essence, these investments require minimal capital outlay and allow an investor to see a business take shape (or not) and then choose to invest in the future. It also allows mores companies to get funded to pursue their entrepreneurial ambitions.
 

Healthcare VC – Somebody Get a Doctor

With chatter about an unfriendly regulatory landscape getting louder and a generally uncertain exit environment for healthcare, VC to the sector continued its consistent trend downwards registering 143 financings in Q3’11 vs. 184 in Q3’10. For data on medical device companies, visit Medical Device Insights.

Green Tech / Clean Tech Bounces Back

From its weak Q2 performance, green tech saw some pep in its step with deal and dollar increases. Cali, Mass and Texas were leading geographies. Unlike tech and healthcare, green tech saw seed deals disappear and early-stage funding hit a five quarter low. Renewable energy which continues to be the top destination for green VC investment continues atop the areas of green tech but has been steadily declining over time. For more data on Green Tech, visit Green Tech Insights.
 

California Still Reigns (Boring)

California is still the top destination for funding and deals. Software and energy saw an uptick stealing share from healthcare and internet VC. Early stage dollars did shrink in the quarter.

Massachusetts – Is Lack of Focus a Problem?

Since funding dollars are prone to wild swings based on a handful of mega-deals, deal activity is the better gauge of the health of a market. On this variable, Massachusetts saw deals decline on a year over year basis while New York and California grew deal activity over the same period. New York has become a hub for tech VC but is largely void of exposure to other sectors. On the other hand, Massachusetts has significant sector diversity which can be viewed as good thing, but is there a “jack of all trades, master of none” issue facing the state? Or is this diversity a positive if armageddon hits any particular sector?
  

Texas Holds Strong

The Lone Star State retains its industry diversity across industry categories. Deal and dollar volume stayed steady.
 

Washington Wakes Up (A Bit)

After wondering if folks were “Sleeping in Seattle” in our Q2 venture capital report, Washington sees a bit of a bounce back with large Zulily deal. Deal volume remained flat. Healthcare sector grew its overall share of Washington.


Quarterly Venture Capital Report – Q3 2011