Venture capitalists didn't find much to like in the tech sector in 2009, according to a report from PricewaterhouseCoopers and the National Venture Capital Association picked up by The New York Times. The data gathered for the report showed that venture capitalists invested $17.7 billion in 2,795 start-ups last year -- 37% less money and 30% fewer deals than in 2008. In fact, venture investing hit its lowest level since 1997.It is hard to pin down the exact cause of the drop. Most of it can probably be traced to the horrible recession. Some may be tied to poor returns on investments, which may be a byproduct of the bad economy. Another possible cause, which is even harder to measure accurately, was the relative dearth of attractive deals: In the Internet segment, for example, there was nothing like YouTube or Facebook. The 2009 crop of investment options may have been weak.
Another factor which could be hurting venture capital returns and investments is competition from established companies. Corporate buyers have been aggressive in acquiring many of the best early-stage companies. Google (GOOG) bought mobile ad firm AdMob. Apple (AAPL) countered with its own investment in the sector by buying Quattro. The mega-tech companies have tens of billions of dollars on their balance sheets, while VCs are struggling to raise money in a harsh economic climate.
If the economy improves sharply in 2010, it will be telling to see whether venture capital activity improves as quickly. The investment returns in the venture business may have fallen just far enough to do long-term damage to the industry.
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