Gloomy data for VCs, but web startups thrive

By Galen Moore

Two venture capital industry trackers released dour news this morning. Analyst firm CB Insights reported $5.9 billion invested over 612 deals in the second quarter of 2010, indicating the industry’s recovery appears to have hit a plateau. Meanwhile, a survey of venture capitalists published by the National Venture Capital Association (NVCA) said most U.S. VCs expect their asset class to continue shrinking.

In the U.S., VCs invested just 11.3 percent more dollars in Q2 than they did in the year-ago period. Activity was flat – with one less deal closed than in Q2 2009. VC’s “tepid” recovery may indicate a “new normal” for funding levels, around $20 billion to $25 billion. In 2007 and 2008, VCs invested closer to $30 billion a year.

Meanwhile, 90 percent of U.S. VCs expect the number of domestically active firms will shrink between now and 2015, according to the NVCA’s survey of 500 venture capital investors. VCs in China, India and Brazil are more optimistic, predicting venture will add firms in their countries during the same time frame. European and Canadian VCs also predicted contraction – although not as drastic as their U.S. counterparts.

However, VCs appear to have recovered their enthusiasm for seed investing in Internet companies. Last year, cautious VCs seeded just eight Internet startups during the second quarter, with $7.4 million in total, according to CB Insights. In this year’s second quarter, 25 Internet startups got $23.1 million.

Dow Jones VentureSource is expected to release its venture financing data on Saturday. The NVCA’s financing report is likely to emerge next week.