Venture Capital Investment Plunged In '12: Danger To Future Tech Growth?

The bad news is out: Investment by U.S. venture capitalists fell 10 percent overall last year to only $26.5 billion, the worst performance in three years, the National Venture Capital Association reported. While some sectors, headed by software, had big increases, others declined.

Potentially the worst reading is that so-called “seed” or initial investment in technology startups plunged 31 percent to only $725 million. Venture capitalists backed only 274 new companies, or 38 percent fewer than in 2011.

First-time financing dropped 24 percent to only $4.1 billion going to 1,163 companies, the survey found.

By not risking new cash in startups, the caution by the sector, which helped fuel Silicon Valley and many of the promising biotech startups of 2012, could imperil the markets five and 10 years in the future, potentially starving entrepreneurs of cash they need to support good ideas that become companies.

“We hope the coming year brings with it more certainty and encouragement across all sectors,” said Mark Heesen, president of the venture capital association. The study was conducted by Pricewaterhouse Coopers, which excluded foreign and corporate investors as well as the venture capital units of companies such as Intel Corp. (NASDAQ:INTC), the No. 1 chipmaker, and Dell (NASDAQ:DELL), the No. 3 PC maker.

The biggest recipient of new venture cash was software, which took in $8.3 billion, 10 percent more than in 2011, in 1,266 deals, the survey found. That was the highest level of investment in 10 years.

Biotechnology, with $4.1 billion in 466 deals, ranked second, but the dollar amount fell 15 percent. Investment in lean technology, with $3.3 billion in 267 deals, fell 28 percent. Internet-specific companies, with $8.7 billion in 976 deals, attracted 5 percent less cash.

Other sectors fared worse, the venture capital report determined.

Investment in business products and services plunged 55 percent, electronics and instrumentation declined 46 percent and semiconductors fell 32 percent.