That's the main takeaway from a new survey detailing trends in venture capital investments during the fourth quarter of 2008 by the California law firm Fenwick & West. "
"Background — We analyzed the terms of venture financings for 128 companies headquartered in the San Francisco Bay Area that reported raising money in the fourth quarter of 2008.
Up rounds exceeded down rounds 54% up vs. 33% down with 13% flat. This was the lowest amount by which up rounds exceeded down rounds since 3Q04. Perhaps more ominously, down rounds increased each month through the quarter, and for December 2008, 45% of all financings were down rounds, compared to 48% up and 7% flat. "
" A breakdown of 4Q08 financings by industry shows that Web 2.0/digital media was by far the strongest industry. When Web 2.0/digital media companies are excluded from the results, up rounds decreased to 46%, down rounds increased to 39%, with 15% of rounds flat.
The Fenwick & West Venture Capital Barometer™ showed an average price increase of 25% for companies receiving venture capital in 4Q08 compared to such companies' prior financing round, a significant decline from the 55% reported in 3Q08, and the lowest quarterly total since 1Q05. If Web 2.0/digital media financings are factored out the Venture Capital Barometer would have been flat (0%).
Anecdotal evidence indicates that there is a flight to quality, with venture capitalists focusing on funding their most promising companies, and perhaps even pulling forward financings for those companies, to make sure they have sufficient funds should the poor financing environment continue for a prolonged period, or worsen. If true, this evidence, combined with the significant reduction in U.S. venture investment in 4Q08 described below, could indicate that less promising companies are not being funded (as opposed to being funded at lower valuations) which could cause results to be skewed in a positive direction. "