TechPulse 360

Venture capitalists reopened their doors for business in the second quarter – at least a crack – but abandoned their traditional focus on information technology for healthcare.

Source: Dow Jones VentureSource

Money placed with startups rebounded 32 percent from the first three months of the year to $5.3 billion, even as it fell 37 percent from the same quarter last year, according to Dow Jones VentureSource.

General partners appear to be convinced the Obama Administration’s push for healthcare reform will bear fruit. Investing in healthcare startups jumped to levels from before the financial crisis hit last fall.

Venture firms put $2.2 billion into healthcare portfolio companies, a remarkable 62 percent improvement from the first quarter and only a 14 percent decline from a year ago.

It was the first time healthcare investing surpassed that of information technology, where checks written to IT startups fell 41 percent. Leading the IT decline was the software sector. Investments fell 52 percent.

The information-technology total was the lowest in 12 years, according to VentureSource, and suggests the confidence in the high-tech economy hasn’t returned.
It also says something that is becoming increasingly obvious to policy makers in Washington and business people across the country: the economic rebound is going to be slow and painful.

The perception that entrepreneurs are most likely ambitious twenty-somethings is just that – perception, not reality.

Instead most startups are founded by middle-aged people who have families and are motivated by a desire to be rich.

The average age of an entrepreneur is 40

A study conducted by the Ewing Marion Kauffman Foundation surveyed 549 founders of businesses in the technology, health-care, aerospace and defense industries.

More than 90 percent came from middle class or lower-class backgrounds and are well educated. More than 95 percent have bachelor’s degrees and nearly 50 percent have earned advanced degrees.

They also tend to be middle age – 40 years old on average – when they started their first company. Nearly 79 percent are married.

They study opens an interesting window into the composition of this somewhat mysterious class of company builders. Common wisdom holds that many entrepreneurs toil in their dorm rooms or struggle in a garage.

The study also found that building wealth is a primary motivation. Other motives for starting a company include: capitalizing on a business idea; the appeal of a startup culture; a desire to own a company; and the desire not to work for someone else.

Even with prices down, buyers of technology startups balked at bargain hunting in the second quarter as the merger and public offering markets remained in a downturn induced paralysis.

Venture capital liquidity fell 57 percent in the secon quarter as the idustry returns to 2003 levels

Three initial public offerings of venture-back companies took place during the cautious three months – the first IPOs in about nine months.

But overall, money raised by venture capitalists selling or floating the shares of their portfolio companies fell 57 percent, according to Dow Jones VentureSource. The industry took in just $2.8 billion compared with 6.5 billion a year earlier.

What’s more, the median price paid for startups fell to just under $22 million, down 46 percent.

The dire results led Jessica Canning, VentureSource’s director of global research, to suggest that 2007, when the mergers ad IPO markets began to revitalize after six slow years, was an anomaly.  “The market appears to be correcting the possibly inflated figures,” she said.

But the results are most likely the result of gun-shy buyers and investors waiting out the worse of the economic downturn before committing cash. And it is likely to continue as long as the deep uncertainty of the downturn remains.

At the top of the list of active buyers was Cisco Systems, which bought camcorder maker Pure Digital for $590 million and Tidal Software, a maker of workload management software, for $105 million.

The largest IPO came from SolarWinds of Austin, Texas, which went public and raised $113 million in May

But in a positive sign for startups, VentureSource found that the average company was younger and raised less money than a year ago.

The median age of an acquired company was 4.5 years, compared with 6 years in the second quarter of 2008. At the same time, that company raised $16.3 million, down 30 percent from a year earlier.

In this year’s quarter, 67 venture-backed companies were sold for $2.57 billion, a 60 percent decline.