Over the years, Harry Rein has come up with a simple litmus test for investments in technology startups by his Foundation Medical Partners ”“ if an entrepreneur says he will make Rein rich, it is a good bet that founder will walk away from Foundation”™s office the poorer for it.
If the latest figures are any indication, equally skeptical venture capitalists are yanking the reins on local investments ”“ for richer or poorer.
Nutmeg State companies raised a scant $15 million in venture capital in the fourth quarter and $127 million for all 2008, according to the MoneyTree survey by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Stamford-based Thomson Reuters. It was the second lowest quarterly total since 1996 and the lowest annual total since 1998, a worrisome trend for state officials hoping to promote the formation of fast-growing employers down the road.Â
Perhaps incredibly, the state-backed Connecticut Innovations Inc. was the only venture capital group to stage multiple investments in Connecticut in the fourth quarter.
Fairfield County is home to several private equity and venture capital companies, including Canaan Partners, a Westport firm co-founded by Rein who subsequently left to start up Foundation Medical Partners in Norwalk.
Canaan Partners was one of the dozen most active venture capital firms in the nation last year with 11 deals, none of them in a Connecticut company. Both Canaan Partners and its Westport neighbor Oak Investment Partners were among the 30 most-active venture companies nationally in 2008.
Venture capitalists invested $28.3 billion nationally in just over 3,800 deals in 2008, down 8 percent and 4 percent respectively and marking the first decline in annual investments since 2003.
Investments in the fourth quarter of 2008 totaled $5.4 billion in nearly 820 deals, down 26 percent from the third quarter and the lowest amount of dollars invested since the first quarter of 2005.
Despite the declines, venture capital observers were encouraged by seed-stage investments used to get companies started. Seed-stage investments increased 19 percent last year to $1.5 billion, the highest total seed-stage startups have captured since 2000 at the height of the high-tech bubble.
“To my surprise, expansion in late-stage deals got killed, but investment in early-stage deals and seed-stage deals stayed strong,” said Gloria Skigen, a partner with the Stamford-based law firm Martin, Lucas & Chioffi L.L.P.
Both Skigen and Rein spoke at a conference this month sponsored by the Connecticut Venture Group and the Association for Corporate Growth, with the keynote given by Robert Shapiro, who is chairman of the Washington, D.C.-based consulting firm Sonecon L.L.C. and who was U.S. undersecretary of commerce and economic affairs between 1997 and 2001.
The lone industry sector to register a strong increase was so-called clean technology addressing energy and environmental products and services, with investments up by half last year. The media and information-technology services sectors also saw increases in funding, helping to drive a lift in New York”™s venture capital funding last year, one of the few areas to register an increase.
In Fairfield County in the fourth quarter, just three companies registered a total of $1 million in venture capital, with Westport-based LegiTime Technologies registering the lion”™s share of that amount as it develops security software for mobile communications.
Orange-based SurgiQuest Inc. dominated the state”™s fourth-quarter funding total by recording $9.5 million from San Francisco-based CMEA Ventures.
Despite the sharp drop in funding locally, Rein said he and other venture capitalists remain alert for opportunities.
“There will be a consolidation, and when there is a consolidation there will be disruption, and when there is disruption there are ”¦ opportunities for entrepreneurs,” Rein said. “I”™m of the view that great companies get founded at times like these, and history has proven that correct ”“ but we have never been in one like this before.”
