Q2 report: Funding data strong despite weaker IPO market

Aug 25, 2004 — Despite a weakening stock market and the withdrawal of a high-profile nanotech IPO, don’t expect the pace of small tech investment to slacken much.

At least, that’s the message from investors, industry experts and the second quarter’s venture funding data.

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“Short term, it confirms that we are in a bear market, and the IPO window is closing for early-stage companies,” said Charlie Harris of Harris & Harris Group about the early August IPO withdrawal of Nanosys, a Palo Alto, Calif., startup that had planned to go public. “Long term it won’t mean much for Nanosys in particular or nanotechnology in general,” he added.

Kitu Bindra agrees. “I don’t think companies are going to be impacted,” said Bindra, an intellectual property lawyer at Burns Doane Swecker and Mathis who chairs the company’s nanotechnology team.

Investors put $222.5 million into 29 companies involved in MEMS, microsystems or nanotechnology in the second quarter, according to a Small Times analysis of the MoneyTree Survey by PricewaterhouseCoopers, Thomson Financial Venture Economics and the National Venture Capital Association. The amount invested and the number of deals is up over the first quarter, when investors put $173.6 million into 26 companies.

However, the numbers diverge when compared with last year. This quarter’s $222.5 million is down from the $242 invested in the second quarter of 2003, but small tech deal flow increased significantly over the 23 deals during the same period last year. As a result, this quarter’s average deal amount of $7.7 million is down dramatically from the $10.5 million average in the year-earlier period.

Small tech accounted for 4 percent of the $5.6 billion dollars of venture capital invested in the U.S. market in the second quarter, up slightly from 3.8 percent in the first quarter but down from the 5.6 percent it accounted for in the second quarter of 2003.

An analysis by funding stage shows that 15 expansion stage companies were responsible for $130.8 million and eight late stage companies accounted for $72.6 million. Five early stage companies accounted for $19 million and there was one startup/seed investment for $50,000.

An analysis by industry shows a broad distribution of funds across a variety of industries. There were six biotech deals and five deals each in the categories of electronics/instrumentation, industrial/energy, medical devices and equipment, and semiconductors. The industrial/energy category was responsible for the most dollars deployed in any specific sector, $49 million.

A nano-only analysis shows that investors put $41.1 million into eight nanotechnology companies in the second quarter, up in dollar terms over the first quarter’s $37.3 million but down slightly in terms of deal flow from the first quarter’s 11 rounds. Whereas the amount of money invested in nanotech companies is not likely to exceed the $301 million deployed last year, it is likely that the number of deals will top last year’s 34 as investors ferret out new early stage investments.

Early stage investing in nanotech had declined as a percent of total deal flow in late 2003 as investors focused on later-stage companies that could be candidates for an IPO. The percent of nanotech investments classified as either startup/seed or early stage dropped from 54 percent in the 2003’s second quarter to 38 percent in the third, to 27 percent in the fourth.

However, early stage nano investing picked up this year. Of the 19 nanotech deals closed during the first half of the year, 42 percent were early stage. Early stage rounds are generally smaller so a shift toward earlier stage funding can yield more rounds that account for fewer dollars.


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