The latest VentureDeal quarterly report is out (see pdf) and it suggests that VC activity in tech has slowed down in the third quarter. Overall, 343 US companies raised $1.8 billion in venture capital funding in Q3 2010, representing a 14% decline in total funding amount compared to the previous quarter.  The number of companies funded has also declined by 6%.

It’s hard to establish that a decrease in funding in the aggregate level is an indicator for future trends in the market, as the graphs below clearly show the strong cyclicality of VC investments, at least in some of the tech segments. However, smarted people than me should be able to determine whether this is an insignificant slump, or the sign that there was a funding bubble 2.0 after all and it is slowly deflating. (I highly recommend reading Naval’s There is No Angel Bubble. There are Many Angel Bubbles, New York Time’s A Silicon Bubble Shows Signs of Re inflating and Fred Wilson’s Invest in the mess)

Let’s take a look at the US VC funding highlights for Q3 2010:

Digital media took the hardest hit this quarter, with $128 million in funding of 32 companies, representing a 69% decline compared to the previous quarter. eCommerce is the smallest vertical in the US tech venture investments, with only $39 million invested in Q3, in eight companies. When you think about the size of the Internet and the US ecommerce market – that’s really not a lot. I’ve recently heard that some VCs stay away from ecommerce deals since the strategies are replicable by competitors and the business ends up competing on price – not the ideal place when you’re looking for ‘unfair advantage’. The Software segment, the largest amongst US tech investments with $847 million invested in 136 companies has actually seen an increase of 19% in the total sum invested.

A notable deal in the software vertical includes Israel-Massachusetts-based uTest (CEO interview on VC Cafe), who landed $13 million from Scale Venture Partners and others. uTest created a crowdsourced software testing marketplace that uses a “Pay per Bug” business model. uTest plans to use the proceeds of this round to expand its tester base and move into other service categories.

The Internet vertical has seen $774 million in venture capital funding during the quarter allocated among 167 companies. Amongst those, only about 30 deals were early stage (A round) totaling about $200 million in investments. The average early stage round was $6.7 million.

Two interesting deals in this vertical were Chegg’s $75 million round from Hong Kong-based Ace Ltd. Chegg has developed a book renting service for students on campuses (think of it as a Netflix for student books) and managed to raise $200 million to date to attack this $10 billion market. The other is Angie’s List, a service provider matching company, who managed to raise $22.5 million for “The Big Deal”, a local group buying service (sounds familiar?).

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Eze Vidra

Head of Google for Entrepreneurs Europe and Campus London at Google
Eze is the Head of Google for Entrepreneurs Europe and Campus London. In 2005, he started VC Cafe to shine a spotlight on startups and Venture Capital in Israel, and in 2012, Eze founded Techbikers, a non-for-profit that supports education through cycling challenges for techies.
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