Internet venture capital action stalls in Q3

Data from CB Insights shows social, cloud start-ups attracting funding

Venture capital investments in Internet start-ups stalled in the third quarter, with the total number of deals the same as in Q2, while the total dollar amount dropped, according to data released Wednesday by private equity research firm CB Insights.

There were 233 separate venture capital investments in Internet start-ups during the third quarter, matching Q2's total. But total VC dollars invested in Internet start-ups in Q3 dropped to $1.253 billion from $1.618 billion in the second quarter. That Q3 dollar amount is the lowest in the past four quarters. CB Insights attributes the falloff to "a dearth of mega-deals."

Some highlights:

* California netted 44 percent of all deals and 50 percent of VC investments in Q3

* The two cities getting the largest number of deals and dollars -- by far -- were San Francisco (36 deals, $131 million) and New York (31 deals, $126 million). In a distant third was Palo Alto, Calif. (10 deals, $68 million).

* The top Internet sector attracting deals and dollars was social (14% of all deals, 11% of all VC money), followed by "advertising, sales and marketing" (12% and 13%).

* CB Insights says "cloud computing is strong" with investment in business intelligence apps and data storage, which combined comprise 13% of all deals in Q3 and 19% of all dollars. It's not likely, however, that all of the investments in these groups were cloud plays.

* A previously hot Internet sector, gaming, "falls of the map," according to CB Insights, with no deals appearing in the Q3 data.

One thing that stands out as you look at the data is that the average investment in a social networking start-up is smaller than the average investment in more enterprise-critical sectors such as business analytics, data storage and cloud computing. So social is big, but investors are placing smaller bets.

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