According to a global year end analysis by Dow Jones VentureOne and Ernst & Young, $25.39 billion has been invested after the first three quarters of the year, and investment is expected to top $32 billion after the fourth quarter, the highest since $51.22 billion was invested in 2001.

The report shows that considerable interest has been shown in new markets such as China, where deal flow is poised to reach an all time high, and in emerging industries including the burgeoning “cleantech” segment and Web 2.0. The analysis found that $761.4 million has been invested in clean technology on a worldwide basis so far this year, up 50% from $504.1 million invested after the first three quarters of 2005.

“The new wave of venture capital investments around the globe, particularly at the early stage, has been driven by a number of factors," observed Gil Forer, global director of Ernst & Young's Venture Capital Advisory Group.

He continued:

"First, demand for innovation in sectors such as Web 2.0, cleantech and biotechnology is increasing in both mature and emerging markets. The positive exit environment and the end of the fund raising cycle in most markets is spurring investments. Venture-backed companies also have higher capital requirements today as the median time from initial VC financing to exit lengthens and the need to establish global operations comes earlier in their life cycles in the face of growing global competition."

"Finally, venture capitalists are responding to the need of large multinationals to get closer to the innovation pipeline, whether through partnerships with promising start-ups or acquisitions of innovative companies."

Steve Harmston, director of global research at VentureOne, added:

“Once again, this year has shown that venture capital follows a cyclical pattern with the cycle ramping back up in 2006 in conjunction with a new wave of global activity. This is particularly evident at the early stage, where a plethora of emerging venture-backed companies is aiming to improve the health of the planet and evolve the way we communicate with each other."

"In addition, the burgeoning consumer technology market and the rapid pace at which these advancements spread to consumers around the world, is providing much of the impetus for the solid growth of the global venture capital industry."

The analysis found that the year has seen relatively robust levels of liquidity in the major geographic areas, including strong merger and acquisition activity for venture-backed companies in the US and Israel. The US has posted 311 venture-backed M&As at the third quarter, and Israel has posted 32, both up from last year's levels. Meanwhile, the median amount being paid for those companies - $50 million in both the US and Israel - has topped 2005 amounts in both countries.

There was also relatively steady venture-backed initial public offering (IPO) activity around the globe, the report noted. In Europe, in particular, 56 have been completed through the third quarter, making it likely that Europe will complete the most venture-backed IPOs this year since 2000. However, the sizes of IPOs, particularly in Europe, are at much smaller levels, with only $1.22 billion cumulative raised in the European public offerings so far. The US has seen 37 venture-backed IPOs so far this year and $2.47 billion raised, putting it on a path to exceed last year’s level.

Worldwide, the amount directed towards venture capital investing has been on an upward trend since 2003, and this year has continued to build on that momentum with $25.39 billion invested after the third quarter. However global venture capital fund raising - at $24.22 billion, remains off the pace of last year, when it topped $33.18 billion due to particularly strong private equity funds in Europe.

Forer noted that in India, venture capital investment activity has accelerated in the first three quarters of 2006 by both US and local venture capital funds.

"We’ve seen as much as $178 million invested in 48 deals in India this year,” he observed.

The analysis found a striking amount of early-stage activity in 2006, particularly in the more established venture capital markets. For example, 42% of the completed rounds in Europe so far this year have been seed and first rounds, the most proportionally since 2001. In the US 36% of the rounds have been seed and first rounds, the same percentage as last year, but the most since 2001.

“Overall, this infusion of early-stage activity is a positive sign for these established markets, indicating investors are finally able to venture past their existing portfolio companies and are seeing the significant potential in emerging areas and technologies,” said Harmston.

The report noted that other evidence of the current status of the market is the median size of venture capital deals, which grew considerably in 2006, reaching $7 million in the U.S., $5.5 million in Israel, $5 million in China and $3 million in Europe after the third quarter.

“We have seen median deal sizes at their highest levels in at least six years, demonstrating that investors are placing bigger bets on selectively fewer companies to sustain the most promising emerging market leaders as they compete worldwide to become the next global market leaders,” said Forer.

Looking forward to 2007, the report foresees that the improving liquidity landscape is likely to continue in the next year on a global basis. The year will also likely see even more strengthening of new venture capital markets in Asia, along with additional investment focused on emerging areas of the Internet and the environment, it said.