Q4: A Start-up Funding Downer In DC

February 10, 2011

10:36 am

In an up year of venture capital investing, the fourth quarter of 2010 was a downer. This was particularly true in DC, where venture capitalists (VCs) invested $143 million dollars in 23 companies.  That compares to Q3 2010 where $260 million was invested in 33 companies.

Feeling bad about that? Let me make it worse. One of the 23 companies, Arlington Virginia-based OPOWER collected $50 million in  funding last quarter.  OPOWER, an energy efficiency software company accounted for 35% of the total.  If OPOWER was removed from rest of the 22 companies that garnered funding in Q4 accounted for only$93 million.

Even with a weak 4th quarter, 2010 still finished as an up year with dollars invested increasing by $230 million and 5 additional companies receiving funding than the prior year.

Yet looking back at the past four 4th quarter numbers, Q4 was the weakest by far. The drop in funding last quarter was not a national trend.  Nationally, Q4 revenue rose from $4.9 billion to $5 billion.  In Silicon Valley, for example, investments rose from $1.8 billion in Q3 to $2 billion in Q4.

Q4 DC investment numbers were a disappointing surprise after each of the first 3 quarters in 2010 were higher than the previous quarter and each was higher than the same quarter in the prior year.  In addition the 4th quarter is traditionally the highest investment quarter of the year. So for many people, this result was a surprise.

The mixed message of Q4 was a weak finish to an otherwise up year.  Is it foreshadowing a downward trend? Were the first 3 quarters the dreaded dead cat bounce or was it just a statistically anomalous quarter?

The good news is that this down quarter was more of a DC thing than a national trend.  Maybe we can chalk it up to the distraction of the Tea Party settling into DC.  All the tell-tail signs still point to a bullish return for start-up funding.  Yet last quarter’s results make it clear that we are not out of the woods and the irrational exuberance being exhibited in large-cap private companies like Facebook, Groupon, and Living Social has not yet trickled-down to small-cap, start-up firms.

It’s still too early in Q1 to see if the return to growth continues.  I’m still bullish, but I’m certainly more cautious then I felt after Q3.

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Glen Hellman (@glehel), is an angel investor, serial entrepreneur, and works for venture capitalists as a turn-around specialist. He is the Chief Entrepreneureator at Driven Forward LLC, frequently muses on his blog, Forward Thinking, and works with entrepreneurs to help them figure out what to do and get them to do it.

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