When the National Venture Capital Association in July released its second-quarter MoneyTree report, which tracks nationwide investment by VC firms, the only bigger bummer than the industry's ongoing slump was the fear that things would look even worse in the third quarter.

Mission accomplished. With investors feeling cautious amid a slow economic recovery, venture funding dropped in the latest quarter from the previous three months, according to the most recent NVCA report.

Venture firms invested $6.5 billion in 890 deals in the third quarter, according to the report, which the association prepares with PricewaterhouseCoopers using data from Thomson Reuters.

That's down 11 percent in terms of dollars and 5 percent in terms of deals from the second quarter. And it's substantially down from the third quarter of 2011, when $7.3 billion went into 992 deals.

Nor was the MoneyTree report the only industry tracker that reported declining investments in the third quarter. According to a rival survey by Dow Jones VentureSource, the number of venture investments in U.S.-based companies dropped 32 percent in dollars and 9 percent in deals compared to the same quarter last year.

Add it all up, and it's further evidence that -- barring a rip-roaring end to the year -- 2012 is likely to fall short of 2011 in terms of both dollar amounts invested and the number of deals.


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Venture investors as a group pumped close to $30 billion in private companies last year -- an uptick over 2010, which itself had marked something of a turnaround for the industry after two years of declines.

Still, there's reason to be hopeful that the fourth quarter could present a turnaround.

Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers, noted that VCs in the third quarter continued to be cautious "due to the lack of a significant number of liquidity events." But with the solid IPOs of Silicon Valley software companies Trulia and Qualys at the tail end of the quarter -- and Workday's even more robust stock debut last month -- a number of valley software makers are lining up to go public before the end of the year.

The improving IPO market was one reason cited for improved optimism in a just-released quarterly survey of venture capitalist attitudes. That report, compiled by the University of San Francisco, had noted a dour mood in the second quarter, but things are looking up.

"Silicon Valley remains the epicenter of the three most compelling market opportunities in technology: The mobile Internet, cloud computing and big data," Jeb Miller of Jafco Ventures told USF researchers.

"The IPO market remains open for high quality issuers," added Miller, one of 31 VCs who participated in the poll.

There were other bright spots in the quarter. The MoneyTree report said the software industry received the highest level of funding of all sectors, with $2.1 billion invested into 304 deals in the third quarter.

"Information technology investment continues to be very strong, particularly in the Internet arena," said NVCA president Mark Heesen in a prepared statement.

On the flip side, the cleantech sector saw a big drop in dollars: $791 million invested, compared to $991 million in the second quarter. The number of deals, 58, was virtually unchanged from the previous quarter.

"We continue to see cleantech investment shifting concentration to smaller, more capital-efficient deals," said Heesen.

Life sciences investment also remained low, which Heesen blamed on the large dollar amounts needed to develop biotech products, the long time to bring them to market and "ongoing concerns regarding regulatory uncertainty."

Contact Peter Delevett at 408-271-3638. Follow him at Twitter.com/mercwiretap.