Venture cash for Internet companies takes a nosedive

Venture capitalists dramatically scaled back investments in Internet-specific companies in the second quarter of 2009, even as the venture industry on the whole showed signs of rebounding.

U.S. venture capitalists invested $524 million across 124 deals for Internet companies in the second quarter, according to the MoneyTree Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA). That’s “a 15 percent decrease in dollars and a 12 percent decrease in deals over the first quarter of 2009 when $593 million went into 135 deals,” researchers reported.

While Internet-related investments decreased 15%, venture capital investments on the whole rose 15% in terms of dollars since the first quarter, while remaining flat in the number of deals. Second quarter investments totaled $3.7 billion and 612 deals.

Internet-specific companies, defined as any company whose business model is fundamentally dependent on the Internet, have suffered as much as any sector during the recession. Investments had risen to $1.66 billion in the second quarter of 2008, more than triple the current level.

Several bright spots emerged in technology investments. The life sciences category, including biotechnology and medical devices, received $1.5 billion in second-quarter financing, a 47% increase. Clean technology companies emerged from the quarter with $274 million, a 15% jump over the first quarter. Still, this year’s investments in both life sciences and clean technology are lagging significantly behind 2008 levels.

One promising sign is that investments in start-up and seed companies reached $475 million, far more than the $186 million received in the first quarter of 2009 and more than the $413 million received in Q2 2008.

While there are more positive signs than at the beginning of the year, there is still much room for improvement in venture fundraising and exit activity, meaning IPOs or mergers and acquisitions.

“We continue to engage in a healthy debate as to the right level of funding for our industry, especially given the clean tech category which, despite lower investment levels this quarter, continues to offer a great deal of promise for future opportunities,” NVCA president Mark Heesen said in a press release. “As we predicted last quarter, we continue to anticipate a gradual increase of investment through the remainder of the year.”