Benchmarks: Q1 2005 venture capital investments.(Mergers, IPOs, and Venture Finance)

Our analysis of the first quarter's VC numbers reveal a stagnant current in the flow of VC investment to the market. According to PricewaterhouseCoopers MoneyTree Survey, total Q1 investment numbers came in at $4.6 billion as opposed to $502 billion in 2004's Q1 numbers. Of this year's totals, software held onto to its traditional number one slot with 198 companies gathering in approximately $1.01 billion of VC funding or 23% of all deals; these numbers are down slightly from 2004's Q1 totals, $1.3 billion and 201 companies, respectively.

There have been a spate of recent reports in the press about how VC firms are renewing their search for new and innovative business models but the numbers don't reflect this. First time financings were very low, with only $75 million, or 1.62%, of VC money directed towards firms seeking seed capital. We don't believe the problem lies in the ability of companies to innovate or move into new markets. In software, the continued growth of broadband, the rebirth of the ASP model, and the convergence of mobile platforms such as PDAs and phones is driving innovation, with new application categories appearing almost weekly. We believe that the VC community is still waiting for its financial toes to heal from the multiple shots to its collective foot inflicted on itself during the dot.com bubble. But if you're a small firm looking for seed funding, your chances are grim.

The particular outlier in this report is the $108 million handed over to Webroot, a company developing anti-spyware products. (We're particularly impressed by this number since Microsoft is currently giving away a very competitive product for free in this market.) The company's flagship desktop product, Spy Sweeper, has received consistent kudos from the press and in January, 2005 received PC Magazine's Editor's Choice award for the third time. In our experience, software companies, particularly those with desktop products, fail to realize the significant impact excellent press can have on your financial health; the lofty numbers for Webroot reflect in part this multiplier effect.

 VC Disbursement by Development Stage  If you're a software startup looking for seed money, it's going to be tough; only 75 million dollars went to early startups in all categories.  Expansion          $1,969 Later Stage        $1,831 Early Stage          $752 Startup/Seed          $75 Note: Table made from bar graph.