U.S. Venture Capital Investing Continues to Outpace 2005 With 5% More Capital Boosting Third Quarter Total to $6.36 Billion

Market Wire, October, 2006

For the third quarter in a row, U.S. venture capital investing continued to outpace last year's activity, with $6.36 billion directed to 611 deals, according to the Quarterly Venture Capital Report released by Dow Jones VentureOne and Ernst & Young LLP. VentureOne is the publisher of the VentureSource database. Overall deal count increased 2% from the third quarter of 2005, and the capital invested was 5% higher than a year ago.

After the first three quarters, year-to-date investment has reached $19.45 billion in 1,851 deals.

"This is the first time since 2001 that we have seen three consecutive quarters in which investments exceeded $6 billion. For the nine months ended September 30, capital investment is up 10% from where it was a year ago and deal flow is tracking 5% ahead of 2005 levels," said Joseph Muscat, Americas Director of the Ernst & Young Venture Capital Advisory Group. "Factors contributing to this trend include an improved liquidity environment based on the robust merger and acquisition market and the positive reaction of the capital markets to recent technology IPOs. We also continue to see venture capital investors focusing on emerging sectors like alternative energy, which saw deal flow more than triple from a year ago, and the Internet-dominated information services segment -- home to many of the Web 2.0 companies -- which saw 41% more deals than in the third quarter of 2005."

Increased early stage financings are another positive sign for the market, likely driven by the more than $35 billion in new funds raised over the past 18 months. In the third quarter, 38% of all venture capital rounds went to seed- and first-round deals, the highest allocation percentage this year. In fact, this was the first quarter of this year that more seed and first round deals were completed than later round deals. In addition, the $1.49 billion invested in early stage financings was the most capital invested to these rounds in a single quarter this year and was 13% higher than similar round investments last year.

"It's a positive sign for the future of the venture capital market to see a solid pipeline of early stage investment, although this activity is stronger in healthcare, where 44% of the rounds were early stage, than in the information technology segment, where only 32% of the rounds were early stage," said Steve Harmston, Director of Global Research at VentureOne. "These early stage financings are particularly taking off in some key segments such as biopharmaceuticals, where more than half the rounds are seed and first rounds, and medical devices, where 38% of them are concentrated in these round classes. Also interesting is that in the aforementioned information services segment, some 61% of the deals in the third quarter were seed and first round deals. The percentage allocation was even higher for the energy segment where 79% of the deals were early stage."

By industry, capital investment in healthcare companies increased 3% over the same quarter a year ago, reaching $2.05 billion in 159 rounds. The biopharmaceutical segment was the major focus, with 72 deals and $1.27 billion invested, an increase of seven deals and 9% more capital than last year. In addition, the median size of a biopharmaceutical deal was $14 million in the third quarter, the highest median on record. The median size of an overall healthcare deal was $7.5 million, down slightly from $8 million a year ago.

The information technology (IT) industry also posted significant activity in key areas. Overall deal count was up by nine deals to 365 and investment increased 4% over a year ago to $3.56 billion. Within the category, investment in software companies rose 8% to $1.47 billion from a year ago, although 28 fewer software deals were completed. The information services segment posted 82 deals (a 41% increase in deal flow) although capital declined 9%. In communications, $861.6 million was invested, a 10% increase, plus there were six more communications deals completed. The largest deal of the quarter was an IT deal -- the $132 million later stage round in telecommunications semiconductor company Cortina Systems of Sunnyvale, Calif. The median size of an IT deal was $7 million, up from $6.6 million a year ago.

Strong interest continued in the third quarter in alternative energy and energy conservation products. There were 14 deals in these segments and $110.2 million invested, about 2 1/2 times more than was invested here a year ago.

By region, the San Francisco Bay area remained the dominant market for venture capital investing, with 207 deals and $2.45 billion invested, a decline in the number of deals from a year ago but an 8% increase in capital. Southern California posted a more significant increase in capital, 16%, to $710.6 million, and deal flow was up by three deals. The New York metropolitan region also posted strong growth with eight more deals and capital investment up by 78%. Investment was up 20% in Texas, as a result of four more deals. In New England, five more deals were completed than a year ago, but capital was down 19% to $617.4 million.