Depressing news today from 3i, the UK's biggest venture capital firm, that it's reining back on its investments in early-stage businesses.

We are grateful (ish) to our colleagues at sister title Real Deals who broke the story today that UK-listed private equity firm 3i is pulling back on its support for early-stage ventures. Instead 3i, and fellow venture capitalist Apax, will focus on later-stage investments.

One can understand the business logic in all this - early-stage transactions are immensely time-consuming considering the relatively small sums at stake. However, if the bluest-chip players in the investment community won't support the entrepreneurs of tomorrow, the climate for risk-taking and innovation will surely deteriorate further?

Here's the full story from Real Deals:

3i is planning a reorganisation of its technology and healthcare investment sectors that will see the group’s venture capital business move away from early-stage investments and merge with its growth capital unit, Real Deals has learnt.

The fate of the group’s venture capital-focused offices, in particular its Cambridge operation, is uncertain. However, it seems likely that a number of investment professionals will be able to migrate into other business lines.

The news follows a sustained shift by the London-listed company away from early-stage venture investment in the past few years.

At the start of this decade, 3i’s venture business was split 80:20 in favour of early-stage deals. As of March 2007, the venture business was split around 70:30 in favour of later-stage investments. This figure is believed to have moved further in favour of later-stage deals.

3i denies it is closing its venture business, but the firm has strayed towards larger deals in recent years, particularly in the healthcare sector, where growth capital and buyout deals have dominated.

This month alone, 3i has backed the £174.5m (€238m) buyout of laser eye clinic Ultralase, and backed the $395m (€268m) buyout of Alpharma’s Active Pharmaceutical Ingredients business. It has also linked up with Bain Capital to invest in Quintiles Transnational, a healthcare business also backed by big buyout firms TPG Capital and Temasek. In March last year, 3i invested $175m in EUSA Pharma.

On the technology side, the firm remains committed to later-stage investments, such as its 40 per cent acquisition of TV group Boomerang in January for €36.4m and its £41m investment in Web 2.0 company Seloger in late 2005.

The venture unit has made several early-stage investments recently, including a €2.6m investment in French Web 2.0 company Twenga and a $2.6m seed investment in Light Blue Optics alongside business angel investors. The firm will not make new early-stage investments, but is expected to support existing investments in terms of expertise and funding.

3i’s venture portfolio totalled around £750m at the end of March 2007, and stood at £715m at the end of September following some strong exit activity. Its total investment portfolio is worth £5.1bn.

The venture business made returns of 17 per cent in 2006, before making a small loss last year. It is now back in the black.

The decision has not come as a big surprise to competitors in the industry, who have seen nearly all the larger firms abandon the venture market. Most recently, Apax Partners backtracked on its assertions of being able to juggle a small venture business with the demands of running a mega-buyout fund last summer.

“Our venture results have been very volatile and our focus is on the more stable end of the business,” said chief executive Martin Halusa at the time.

Last month, Index Ventures, a firm renowned for early-stage investing, launched a growth capital fund aimed at later-stage investments in the TMT sector.

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