Venture capital funding for start-ups dropped nationwide and in Massachusetts last year as investors shied away from backing biotechnology companies, traditionally a bright spot for investment in New England.
Overall spending for New England fell to $3.2 billion, a 3.3 percent decline compared with 2011, and declined 10 percent nationwide, to $26.5 billion, according to the quarterly Money Tree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thompson Reuters.
The decline in investments follows a few years of growth in the venture capital market.
“General economic uncertainty continues to hinder capital investments, and venture capitalists are no different,” said Tracy T. Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers US.
That concern especially appears to have taken a toll on young biotech and health care companies, which typically require huge infusions of cash and may need many years to reach profitability. Nationally, the number of investments in early stage biotech and medical device companies fell to the lowest level since 1995.
Investment in biotech firms in the Boston area dropped to $869 million in 2012, about a 24 percent reduction from the previous year, according to the Money Tree Report.
With regulatory uncertainty facing the health care industry, “it’s going to be a more challenging time for life sciences companies to raise money,” said Terry McGuire, general partner of Polaris Venture Partners, a Waltham venture capital firm with about half of its investment portfolio in health care companies.
“Unless you are really committed to the space, you are going to be backing away,” he said.
Still, Polaris had its most profitable year in 2012 due in large part to acquisitions of several health care companies in its portfolio. For instance, Polaris was a major investor in Avila Therapeutics Inc., a Bedford drug maker that was acquired last year by Celgene Corp. of Summit, N.J., for $925 million.
Another reason biotechnology investments may be flagging is because new software enterprises are on the rise and competing for venture capitalists’ attention and dollars, said McGuire. In fact, investment in software was at its highest point since 2001, with $8.3 billion in companies across the country.
“The beauty of software is that it’s capital-efficient,” said Todd Dagres, general partner of Spark Capital, a Boston venture capital firm.
Software start-ups often don’t require a lot of money to get off the ground and, he said, Boston has been the beneficiary of a growing amount of investment in this area, particularly into companies developing database analytics technology for the field known as big data.
Local investment in software amounted to $804 million for 2012, a 28 percent jump over 2011. The biggest software deal in the Boston area last year went to the Cambridge software company HubSpot Inc., which raised $35 million in November.
Silicon Valley companies continued to attract the lion’s share of money, drawing $10.8 billion in venture capital funding for the year. Boston came in a distant second at $3.2 billion, and New York ranked third with $2.3 billion.
The biggest investment deal in Boston last year was by the e-commerce company Wayfair LLC, an online seller of home goods that raised $36 million to expand its staff and marketing efforts.
“They want to be the dominant e-commerce company for the home category,” said Neeraj Agrawal, general partner at Battery Ventures, a Waltham firm that invested in the funding round from Wayfair.
Michael B. Farrell
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