Every quarter Softletter looks at cash-for-equity investments in privately-held software firms. This quarter we see again the up-and-down swinging, quarter by quarter, of both the entire VC market and the software segment as well. On the whole this shows a steady level of investment, but for software this quarter the drop was so low that it is necessary to go back to Q3 of 2003 to find a lower point: $1.035 billion in 201 deals for that quarter in 2003, and $1.038 billion in 155 deals for Q3 of 2005. And while total VC investment is slowly rising, the software segment is losing its grip as king of segments.
Software remains on top of individual segments this quarter, but with only 19.7% of all VC investments. Last quarter it was 22.2%, and a year ago it was 23.2%. Life Sciences (the combined Biotechnology and Medical Devices segments) are now 25%.
Cautious VC money is still concentrated in Later and Expansion stage deals: the investors are feeding successes and only reluctantly putting their money into Startup stage companies. Not all Later stage deals pay off, of course: Xprime, Inc. has collapsed since it received its $10m funding in Q3.
Our Top 50 Software VC Investments table shows us other interesting stories. Last quarter the median deal in the Top 50 was $12.5m; this quarter it is down to $11m. Last quarter had an outlier as number one, a deal that was twice as big as number two. And while this quarter has a similar outlier, and an even larger one than last quarter, the bottom of the Top 50 has slipped from $10m to $8m. Deal competition in software appears to be centered around Open Source Software (OSS) and Software as a Service (SaaS).
Notable press coverage from Q3 (www.nytimes.com/2005/09/20/business/ businessspecial/20rivlin.html?ex=1136350800&en=aa4526678bfeb7ce&ei=5070 and http://seattlepi.nwsource.com/venture/241908_vc23.html) tends to overlook the growing number of investments in SaaS companies.
Top 50 And All Software Deals Compared by Percentage in Each Stage Top 50 All Software Startup 2% Early 13% 17% Expansion 31% 31% Later 56% 50% Note: Table made from bar graph.