U.S. Venture Capital Activity Sees Seasonal Slowing in Third Quarter 2004

Business Wire, Oct 25, 2004

SAN FRANCISCO & NEW YORK -- VentureOne/Ernst & Young Quarterly Venture Capital Report Says That Biopharmaceutical Investments Pick up in Third Quarter.

U.S. venture-capital investment reported its typical slow-down in the third quarter, with $4.56 billion invested in 467 deals, according to the Quarterly Venture Capital Report released by Ernst & Young LLP and VentureOne, a unit of Dow Jones Newswires. Compared with the third quarter of last year, both deal-count and the amount invested were down 4%.

On a positive note, seed- and first-round deals captured a significant portion of activity and investment. Seed- and first-round deals made up 32% of all venture-capital deals this quarter, compared to only 28% during the same period a year ago. The $965.8 million invested in these deals represented a 32% increase over the amount invested a year ago. On the other hand, the number of second-round deals completed this quarter declined, as well as the amount invested in those rounds. This may be a result of fewer initial deals being completed during the last few years, leading to a dearth of companies in line for second-round financings. The amount invested in later rounds also declined.

"Later-round financings may have slowed because investors are expecting their more mature portfolio companies to use capital more efficiently as they move closer to an exit opportunity," said John Gabbert, vice president of worldwide research at VentureOne. "While liquidity options in the form of initial public offerings and mergers and acquisitions have opened up in recent quarters, they have yet to return to the levels of the last decade, causing investors to proceed cautiously as they consider their investments' ultimate exit potential."

Mr. Gabbert continued, "The return of interest in early-stage investments bodes well for the future of the market. Both information-technology and health-care companies saw the highest total amounts invested in seed-round deals in more than two years."

Within the health-care industry, the biopharmaceutical segment offered one of the positive notes this quarter, with 61 deals and $966.9 million invested, representing 25% more deals and 16% more money than last quarter. For the venture-capital market as a whole, health-care deals made up 25% of the quarterly deal-flow, the industry's highest percentage this year. Health care also received 32% of the total amount invested. Among the largest health-care deals was the $48 million later-round deal in Sopherion Therapeutics (New Haven, Conn.), a developer of targeted pharmaceuticals using biosynthetic modules.

"Early-stage health-care companies fared particularly well in the third quarter, with 40 deals raising a total of $357.9 million--the most raised for health-care company formations since mid-2002," said Jeff Fialko, Ernst & Young's venture capital advisory group leader for the mid-Atlantic area. "Early-stage health-care investors were likely encouraged by the ability of the life-science companies with strong pipelines to find IPO exits in today's highly selective capital markets. Thirty-two of the 48 venture-backed IPOs through the third quarter of 2004 occurred in health-care segments."

Fialko continued, "Health-care start-ups also received larger infusions of venture capital to get them off the ground. The median amount raised in a first-round health-care investment was $7.3 million this quarter, the highest amount on record."

The median amount invested in early-stage information-technology companies was also on the rise--reaching $5.7 million in first-round deals--the highest first-round median since the fourth quarter of 2002. Overall, the investment in information-technology companies declined from the first two quarters of the year, with 272 deals and $2.50 billion invested this quarter. The money invested, however, was 8% higher than a year ago. The IT category was responsible for the largest deal of the quarter: the $105 million later-stage investment in Vonage (Edison, N.J.), a phone service provider using VoIP technology.

The investment figures included in this release are based on aggregate findings of VentureOne's proprietary U.S. research and are contained in VentureSource. This data was collected by surveying professional venture capital firms, through in-depth interviews with company CEOs and CFOs, and from secondary sources. These venture capital statistics are for equity investments into early-stage, innovative companies and do not include companies receiving funding solely from corporate, individual, and/or government investors. No statement herein is to be construed as a recommendation to buy or sell securities or to provide investment advice. Copyright (C) 2004, VentureOne.

About VentureOne

VentureOne (www.ventureone.com), a unit of Dow Jones Newswires, has been the leading provider of finance and investment data to the venture capital industry for almost 20 years. VentureSource, a sophisticated electronic database on the venture capital industry, is published by VentureOne.