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So You Want to Get Funded?

According to the National Venture Capital Assn. (NVCA), total venture capital investment for the first quarter of this year was at its lowest in 12 years, down 47% in dollar amounts from the fourth quarter of 2008, and 58% from the same period last year.

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According to the National Venture Capital Assn. (NVCA), total venture capital investment for the first quarter of this year was at its lowest in 12 years, down 47% in dollar amounts from the fourth quarter of 2008, and 58% from the same period last year. "The VC industry isn't immune from the downturn," says Mark Heesen, NVCA's president.

But deals haven't ground to a halt, even if they are smaller. "The first-quarter numbers might be down on last year," says Bob Goodson, co-founder and chief executive of YouNoodle, a San Francisco company that tracks startups. "But we've been seeing activity every day lately." Last month, for instance, medical innovator Lycera received $36 million in Series A funding to continue work on drugs to boost the immunity of patients with abnormal cell growth.

BusinessWeek asked YouNoodle to compile statistics of VC investment from mid-March to mid-April 2009. The idea was to gauge what types of innovation and invention might attract dollars in a downturn. The data could help innovators in various industries assess their odds of obtaining funding at this time.

In the month from Mar. 15, YouNoodle tracked 149 venture capital deals worth $1.55 billion among the 53,000 startups it follows. Of this dollar amount, 26% was invested in biotech and medical devices; 16.5% in energy and clean tech ; 14.3% in consumer Internet; 11.4% in hardware (including semiconductors, gadgets, and PC-related goods); 11.2% in finance; 6.2% in software; and the remaining 14% spread across four other categories such as mobile phones and education, each with less than 6%.

Most of the funding was later stage (34%), followed by Series B (33%), suggesting that investors are taking fewer risks and following established ideas.

Biotech Buildup

NVCA's first-quarter 2009 numbers, compiled in partnership with PricewaterhouseCoopers and Thomson Financial (TRI), also showed that biotech grabbed more dollars than startups in other industries. "We're really seeing incredible life science advancement in a very short period," observes NVCA's Heesen. He points to the fact that raw research and lab experiments supported by National Institutes of Health grants, which Congress agreed to double in 1999 to spark innovation, are finally reaching a stage where their commercial purpose is clear. So scientists and inventors are now forming startups around them and seeking funding.

Perhaps surprising for entrepreneurs and job seekers paying attention to the Obama Administration's much-publicized call for clean-energy solutions, clean tech is currently struggling to find backers. According to the NVCA, the category saw an 84% drop in dollar-level investments from the fourth-quarter of 2008 into the first-quarter of 2009—to $154 million in 33 deals.

"Clean tech is an almost schizophrenic category," Heesen says. "And it's more volatile because of oil prices." In other words, with oil currently inexpensive, investors feel less urgency to back green companies.

Heesen adds that clean-tech inventors and investors will eventually see growth in their field as new, commercial innovations in solar, thermal, wind and other areas surface from labs. "This won't happen overnight," he says. But the sector could likely see a delayed upswing similar to the biotech field. Biotech was unpopular with VCs a decade ago, even as the sector was beginning to receive highly visible grants and government support.

More Scrutiny than Ever

So what advice does Gary Glick, founder and chief scientific officer of newly funded Lycera have for would-be entrepreneurs and innovators? "Being persistent and really critically evaluating and understanding the product and technology, and appreciating all aspects of it, is probably the key to getting funding," he suggests. In other words, those competing for the smaller pool of cash should be prepared to face ever more scrutiny from would-be investors. Those without a solid business plan—and well-proven inventions—need not apply.

And, of course, even those receiving funding need to maintain momentum. A national survey of American VCs and startup owners by the National Association of Seed & Venture Funds (NASVF), conducted the first week of April, showed that 90% of already-funded companies, across industries, weren't able to obtain follow-on funds this year.

Jim Schoeneck, chief executive of San Diego-based BrainCells, which creates treatments for people suffering from central nervous system diseases and saw $50 million in Series B funding a year ago, urges entrepreneurs to consider the long-term up-front. "Certainly now would be more challenging for us [to get funding]. Now, we have a different eye toward survivability," he says. "I'd advise startups to consider, how will you bridge the current economic situation? Do you have 18 months of cash?"