Where Venture Capital Is Still Flowing

Exits are few, but promising start-ups are still getting funded. Check out these hot spots of activity.

A ray of hope in the hard-knocks economy: Despite few foreseeable exits, early stage investors are still making bets in a handful of promising, high-growth sectors.

In fact, venture capitalists have put only slightly fewer dollars at stake as they did this same time last year, before the financial crisis had gained any traction. In the three quarters ended Sept. 30, venture-capital investment was down just 4%, to $22.3 billion, versus the same period in 2007, according to VentureOne, an industry tracker.

Compare that to the relatively comatose market for initial public offerings, which tends to offer the juiciest exits for VC funds. Measured in dollar terms, the 50 IPOs in the first three quarters raised just $30.5 billion, compared with the 261 deals that yielded $60.5 billion in the first three quarters of last year. Only eight companies went public in the last three months, raising a mere $1 billion.

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Some VCs say the difficult market has made it easier to find promising companies. "There are [fewer] tourists right now who are just pitching," says Guy Kawasaki, managing director at Garage Technology Ventures, an early stage venture capital fund. "That yields a better entrepreneur."