US Venture Capital Continued Growth In Q2

by Carla Johnson, Investors Offshore.com

10 August 2007

US companies continued to attract significant venture capital investment in the second quarter of 2007, as venture financings reached $7.4 billion, an increase of 8% over the same period last year, according to the Quarterly Venture Capital Report by Ernst and Young LLP and Dow Jones VentureOne.

The quarterly deal count also rose 8% to reach 717 deals, the highest deal volume since 2001, the report revealed.

The latest increase marks the ninth straight fiscal quarter of year-over-year growth in venture capital invested. One of the most notable trends of the quarter was the continued diversification in life sciences investments, particularly with medical devices, which saw investments skyrocket to $1 billion in 75 deals, the highest totals on record and 58% above the second quarter of 2006, the report noted.

Biopharmaceutical companies attracted $1.1 billion invested in 86 deals. Overall, health care companies received $2.4 billion in financing, a total second only to the $2.9 billion invested in the first quarter of 2007.

“For more than two years, we’ve seen steady growth in the amount of venture capital invested and the promising liquidity markets — on the public exchanges for technology companies and primarily in mergers and acquisitions for health care companies — look to be driving investor optimism,” observed Jessica Canning, Director of Global Research at VentureOne. “Health care continues to attract nearly one-third of all venture capital dollars and medical device companies, interestingly, are converging with biopharmaceuticals as a major draw for investors.”

Information technology companies accounted for the largest slice of the venture capital pie in the second quarter, attracting 10% more capital than during the same period last year with $4.1 billion invested in 435 deals, the report stated. As has been the case since 2002, software received the bulk of IT investment, this time with 179 deals accounting for $1.5 billion. Though deals are down 8%, this is on par with the amount invested in software companies in the second quarter of 2006.

However, the report observed that quarterly data showed that, for the first time ever, information services companies came just shy of raising $1 billion in venture capital financing, garnering $979 million in 131 deals in the second quarter. This is an increase of 56% in deals and 52% in dollars invested over the second quarter of 2006. The information services segment includes IT-based services, such as database design and construction, as well as online services, such as social networks, blogs, wikis and other Web 2.0 companies.

“This is the second quarter in a row that we’re seeing a record number of deals being done in the information services space, and this is due in part to the high-profile liquidity events we’ve seen over the last year,” stated Joseph Muscat, Americas Director of the Ernst & Young Venture Capital Advisory Group. “With Web 2.0 companies able to fully develop products and begin generating revenues very quickly with comparatively small amounts of capital, they are certainly seen as lower-cost investments with a high potential for return.”

The report showed that the communications and networking segment of IT had the same number of deals (62) as in the second quarter of 2006, but saw investment climb 23% to $839 million. This is due to the $113 million in financing raised by Boulder, Co.-based FreeWave Technologies, a developer of ISM band radios and wireless data solutions, which had the largest deal of the quarter. For business, consumer and retail companies, deals and investment declined from a year ago, the quarterly data showed. There was $519 million invested in 61 of these companies in the first quarter of 2007, down from $557 million and 62 deals during the same period in 2006.

The quarterly report also highlighted the trends of larger deal sizes and more money going toward second-round and later-stage investments. The median deal size in the second quarter of 2007 reached $8 million, up from the $7.4 million seen during the same time last year, and the highest median seen since 2000. By industry, healthcare financings had the largest medians at $9 million, followed by information technology at $8 million and business, consumer and retail at $4.9 million.

By round class, deals were up across all stages, the data showed. Early-stage deals accounted for 36% of overall deal flow, with 254 financings in the second quarter, up 17% from the same period in 2006. Later-stage financings made up 41% of the total with 253 financings, the largest number of deals in more than six years. Second rounds accounted for 23% with 160 deals, the highest total since 2002.

By region, the report showed that the San Francisco Bay Area saw 208 deals and $2.5 billion invested in the second quarter. Southern California’s second quarter featured 76 rounds and more than $1 billion in financing. And, in the Northeast, there was nearly $1.5 billion invested in 158 venture financing rounds.

Ernst & Young has also released its fifth annual global venture capital report which shows that the global industry is currently experiencing the highest levels of investment since 2001, with over $35 billion of investment in 2006 in the US, Europe, Israel, India and China combined. According to the report, the US represents the largest market for investment, but growth in investment activity in China and India by foreign venture capitalists is increasing at a rate in excess of 35% annually. Investors are also looking to new industry segments such as clean technology to find tomorrow's market leaders.

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