Given persistent levels of misinformation and/or confusion about venture capital data (learn more here), we encourage you to review our methodology and definitions to better understand the numbers presented in our Q3 2009 venture capital activity data and commentary.

When ChubbyBrain released its Q2 VC funding numbers three months ago, we dared to ask whether the worst could be over. There was some reason to be hopeful: after the depressing multi-year low in Q1 2009, venture capital investing in the United States experienced a surprising resurrection in Q2, jumping to $5.3B which represented a significant increase over the prior depressed quarter’s funding levels.  But we also acknowledged that it was much too early to talk about a trend, let alone a recovery.

Fortunately, the third quarter of 2009 has strengthened the case for cautious optimism. Conversations with investors as well as entrepreneurs and prominent venture law firms provided early anecdotal evidence that activity levels were picking up.  And now it’s official: with ChubbyBrain’s latest numbers tallied, we can announce that money flowing from venture capital investors to entrepreneurs increased by a respectable 14% in Q3 2009 over the prior quarter.   This positive momentum has been further reinforced by the brighter outlook in public equity markets and even some IPO success for VC backed companies (A123 systems recent successful IPO as one example).

Of course, when we look at the year over year numbers, $6.1B still is not nearly where Q3 2008 was with its $7.2B of funding based on our data.  The magnitude of and time for the VC asset class to recover is uncertain at best despite the pundits’ predictions.  However, the sequential quarter over quarter growth story being observed in the data gives us hope that things are improving.

Here is a summary of Q3 2009 highlights:

• More dollars, and even more deals: Bolstered by an uptick in activity in September, Q3 2009 saw the closing of approximately 680 deals worth $6.056 billion. This is equivalent to a 14% increase in funding over the $5.329 billion of investment we tracked in Q2 2009, and an 11% increase in deals. While this presents a continuation of the upward trend since the nadir of Q1, it is also important to note that activity still remains significantly below historic levels.
• September Lets it Rain: Venture capital money got off the sidelines in a big way in September which saw 2009’s highest monthly deal activity on both a dollars and number of deals basis. September represented 40% of the deals in the quarter. With venture capitalists’ wallets opening with increasing speed in the last month of the quarter, it will be interesting to see whether September is an inflection point in a larger VC recovery or a headfake.
• California leads the charge: The Golden state has traditionally received the lion’s share of all VC investment dollars in the US, but in Q3 it took its domination to new heights. Attracting over $1.1 billion more VC money than in Q2, it posted a dramatic increase of over 51%. Next in line in the top five most funded states were Massachusetts, Texas, New York, and Georgia. Overall, companies in 35 states received venture investment.
• Southern comfort: From a regional perspective, the South-Atlantic (comprising, amongst others, Georgia, North Carolina and Maryland) made a particularly strong showing. Not conventionally considered a VC hub on par with the Mid Atlantic (which includes NY, NJ, PA) or even the Pacific Northwest, it nevertheless outpaced both of these regions in Q3, pulling in over $550 million of funding with a large share of this investment coming in the Healthcare sector.
• Healthcare still on top: Healthcare, the big winner in Q2 ‘09, again saw the most venture activity in the third quarter, attracting 32% of all funds. In absolute terms, however, the investment level remained flat at $1.9 billion. Beyond Healthcare, ChubbyBrain tracked investments across 18 sectors, indicating continued participation by venture capital firms across a broad base of industries.
• Green shoots: After the boom of Green investing in Q3 2008, and the subsequent bust in the following quarters, Q3 2009 (and especially September) once again began to paint a more optimistic picture for the overall “industry”. Leading the road to recovery were investments in renewables, in particular solar.
• Entrepreneurs - Dust Off Those Business Plans: Despite predictions that VC firms would squirrel away money just to fortify existing portfolio companies, the ChubbyBrain data for Q3 2009 (as well as Q2 2009) shows that venture-backed seed and Series A deals in early stage companies remains strong. Q3 2009 saw early stage deals account for 30% of the total venture deals being done.

We’ll be exploring the above regional, sector and series trends and statistics in coming posts.

Note:  Soon, we will be releasing a feature that will provide users with access to the  underlying deal and funding data that form the basis of this and other quantitative ChubbyBrain analyses.  If you’d like to be notified when this capability launches, please email us at insights(at)chubbybrain(dot)com.