US Venture Capital Investment Off To Solid Start In 2006

by Mike Godfrey, Tax-News.com, Washington

01 May 2006

Two reports released last week have suggested that venture capital investment in the United States has got off to a flying start in 2006, led by a resurgence of investment in the information technology (IT) segment and the media and entertainment sector.

According to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, which is based on data provided by Thomson Financial, US venture capitalists invested US$5.6 billion in 761 deals in the first quarter of 2006 representing a 12% increase over the same period last year.

“As far as investment equilibrium, it doesn’t get much more stable than this," noted Mark Heesen, president of the National Venture Capital Association.

"In the last 16 quarters, venture capitalists have consistently placed US$4 – US$6 billion into a diverse set of emerging growth companies with no single sector experiencing major surges or major draughts. We are experiencing the regular ebb and flow of venture investing and we are truly at our healthiest and most sound investment point since the mid 1990’s," he added.

The PwC/NVCA MoneyTree Report goes on to state that the media and entertainment sector reached a four-year high, rising 80% over the prior quarter to US$396 million from 57 deals. Several large deals accounted for a significant portion of this increase. Additionally, companies focused on delivering content via the internet accounted for approximately half of the total dollars invested and number of deals.

Software investments rose 12% in Q1 to US$1.2 billion in 197 deals and remained the largest single industry category with 22% of total dollars and 26% of all deals.

Internet-specific companies captured US$861 million going into 145 deals, a 10% increase in investment dollars over Q4 2005. Internet-specific investing has grown slowly over the last several quarters with Q1 accounting for 15% of total investments, compared to 14% in the prior quarter.

However, the telecommunications industry category, which experienced a notable increase in Q4 2005, fell in Q1 by 17% to US$601 million, with a decrease in wireless investments accounting for the majority of the decline, the PwC/NVCA MoneyTree Report revealed.

Investments in biotechnology also declined, falling 24% from Q4 2005 to US$808 million, but the report stated that this was consistent with historical patterns of lower first quarter investing in the sector.

Meanwhile, the Quarterly Venture Capital Report released by Dow Jones VentureOne and Ernst & Young LLP last week suggested that overall deal count increased 6% from the first quarter of 2005 to reach a five-year high. Investment in the information technology (IT) segment led the way, posting 327 deals with $3.36 billion invested. This was nine more deals than a year ago and 13% more capital - the most capital directed toward the IT segment in a single quarter since the second quarter of 2004.

“The results of this quarter's study suggest that investors are placing fewer but bigger bets on exciting, innovative companies," noted Joseph Muscat, Americas Director of the Ernst & Young Venture Capital Advisory Group.

"This reflects a desire by investors to accelerate the business models of these companies and a recognition of the increased capital needs of private companies up to an eventual exit transaction, whether an acquisition or an initial public offering," he added.

The median size of a round of financing in the first quarter of 2006 was $7.5 million, up from $6.8 million a year ago. It was the highest median round size since the fourth quarter of 2000. By industry, both health-care and IT median round sizes were $7.5 million, while the median round size for a products and services deal was $6.4 million.

The largest deal of the first quarter was an information technology company: the $150 million second round for communications company Amp’d Mobile of Los Angeles, Calif., a mobile entertainment services provider.

Also noteworthy for the IT segment was the fact that $727.7 million was directed toward seed- and first-round deals in the quarter. That is the most capital investment in early-stage IT companies since the fourth quarter of 2001. About 32% of all the IT deals in the first quarter were early-stage rounds, about the same percentage as a year ago.

“Overall, the first quarter numbers point to a positive start for the U.S. venture market in 2006," observed Steve Harmston, director of global research at VentureOne.

"The renewed IT activity is a sign that investors are recognizing the significant potential of new information technology innovations and are supporting them once again,” he added.

“But investors also remain committed to existing portfolio companies as the predominance of the capital investing shows," Mr Harmston concluded.

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