"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," said 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 Services Companies Continue as VC Favorites
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. 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 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," said 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 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.
Trends: Deals Bigger, Up Across All Stages
The quarterly report also highlights 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. 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.
Major U.S. Regions at a Glance
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.
Detailed information, including activity by sector, is available upon request for the San Francisco Bay Area, Pacific Southwest and the Northeast. Further breakdowns within each region are also available, including Arizona, Colorado, Los Angeles, Orange County and San Diego in the Pacific Southwest and Boston, Connecticut, Long Island, Lower Hudson, New Jersey and New York City in the Northeast.
Acceleration of Global Venture Capital Investing
Ernst & Young also released its fifth annual global venture capital report, Acceleration, available at www.ey.com. The report details the current state of the global venture capital industry, which is currently experiencing the highest levels of investment since 2001, with over $35 billion of investment in 2006 in the U.S., Europe, Israel, India and China combined. According to the report, the U.S. represents the largest market for investment, but growth in investment activity in China and India by foreign venture capitalists is increasing at excess of 35% annually. Investors are also looking to new industry segments such as clean technology to find tomorrow's market leaders.
