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Early-Stage Startups Alive and Kicking in Q3, Venture Funding Shows

In the middle of a venture capital funding slump, you might think that early stage investments would be the hardest hit—VC dollars would be siphoned away from early-stage deals and poured into existing portfolio companies (conventionally Series B, C, D, etc. deals). In other words, money attracts money.

getting funded badgeYou'd have good reason for this belief. Overall venture capital investment funding levels are significantly lower on a year-over-year basis ($6.1B in Q3 2009 versus $7.2B in Q3 2008, according to ChubbyBrain). The absolute amount of money flowing to these early stage ventures is less than it has been.

But consider the case of the Q3 2009 ChubbyBrain venture capital deal (For a comprehensive view into Q3 venture capital activity, download the 44-page Fast Company-ChubbyBrain Q3 VC Activity report here). Plus, the funding data shows that early stage investing is still definitely happening. In fact, 29% of all deals done by venture capital firms in Q3 fall into the early stage category (typically but not always seed and Series A deals).

VC Deal Volume (#) by Series, Q309

When looking at the current state of venture activity, the numbers in aggregate for early stage venture funding look solid. They are not uniform across sectors as the graph below illustrates—25% of deals in Software are early stage (not including Internet or mobile software) while nearly 40% of all deals in both the health care and electronics sectors (including chips and semiconductors, electronic components) are in early stage companies.

% of Early-stage Deals by Sector, Q3 2009

Given that Health care and Internet are the two dominant deal-count, we looked at the data over the course of the year to see if early stage investment in these sectors has been gaining or losing momentum or holding steady.

Year-to-date, early-stage investment has actually gained momentum in the health care sector and held strong and steady in the Internet sector. The graphs below show the trends.

Health care Series A Investments (#), Q1 thru Q3 2009

Internet Series A Investments (#), Q1 thru Q3 2009

So entrepreneurs looking for that first round of venture money, don't despair. Raising money from VCs is never a given. But the data shows that investors are willing to make early-stage bets on the right ideas. We'll continue to monitor this in the coming quarters to see if the early stage momentum has legs. In the interim, it may be time to dust off or update those executive summaries and business plans.

Fast Company has partnered with ChubbyBrain, an information services company tracking the innovation economy, to provide a quantitative perspective on what is happening in the worlds of VC and angel investment. Look for additional posts leveraging ChubbyBrain data in the coming days and weeks.

For a complete report on VC activity in Q3 2009 CLICK HERE