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Venture Capital Flattened By Slow Economy

The dismal economy continued to put a damper on venture capitalists as they slashed investments by one-half to $3.7 billion in the quarter ending in June. The flow of venture money slowed to a pace not seen since 1997, according to a comprehensive MoneyTree report released Tuesday.

Internet-specific companies pulled in $524 million in 124 deals in the second quarter. The amount represented a 15% dollar decrease and a 12% deal decrease over the first quarter of 2009. Other high-tech sectors experiencing dollar declines in the second quarter were in semiconductors with a 5% decline, telecommunications, down 13%, and media and entertainment, down 48%.

Some IT areas, however, showed surprising strength in dollars invested. The computers and peripherals sector soared 262% while networking and equipment dollar investments jumped 112%. And, investment in IT services increased 28%.

Although the report was disheartening overall, its authors depicted a flicker of hope. "Halfway through 2009 we are seeing more positive signs than at the beginning of the year, including an overall increase in investment levels and an ongoing interest in seed and early stage funding." said Mark Heesen, president of the National Venture Capital Association (NVCA), in a statement. "However, until we see notable upticks in venture fundraising and exit activity -- which drive investment levels -- we won't expect considerable increases in the number of deals completed each quarter."

The MoneyTree report was prepared by PricewaterhouseCoopers and the NVCA based on data from Thomson Reuters.

The highest level of funding for all industries covered in the report was reported for the biotechnology industry, which received $888 million for 85 deals in the quarter.

The report preparers said they were somewhat optimistic about investment activity picking up later in the year. "As we predicted last quarter," Heesen said, "we continue to anticipate a gradual increase of investment through the remainder of the year."

InformationWeek Analytics has published an analysis of application performance. Download the report here (registration required).