Two-thirds of all capital invested in the third quarter - some $3.81 billion - was put to work in 224 later rounds, the most invested in late- stage companies since 2001, while combined seed and first round investment remained steady year-on-year at $1.74 billion. These sizable later rounds helped to push the overall median for a venture capital deal in the third quarter to $7.92 million, a new record.
"The third quarter reinforced that there are innovative and exciting private companies across the industries in which VCs invest," said Joseph Muscat, Americas Director of the Ernst & Young Venture Capital Advisory Group. "Fueling this innovation are the larger deal sizes seen this quarter. The overall level of investment and larger deal sizes are suggestive of a continued bullish view of these companies' prospects and liquidity options."
Fast-Emerging Industries and Venture-Backed Stalwarts
The quarterly report also showed surging investment in the Energy and Advanced Specialty Materials & Chemicals sectors, categories that include the majority of today's "clean technology" companies. In fact, Energy investments jumped 28% compared to the third quarter of 2006 with $590 million put to work in 33 deals, records on both accounts. Thirteen rounds for Advanced Specialty Materials & Chemicals companies raised $277 million, also a record and more than double the amount invested in the third quarter of 2006.
Venture-backed health care companies completed 138 deals during the quarter-a 19% decline in deals compared to the same period last year. However, the data showed that venture firms continue to put more money to work in health care, as overall investment in the industry climbed nearly 4% to $2.47 billion. Most notably, the medical device sector set an annual investment record-in just nine months. There were 30% fewer deals (48) for medical device companies in the third quarter, but they garnered 19% more capital, attracting $830 million and bringing the sector's year-to-date investment total to $2.82 billion, a new high. Biopharmaceutical companies attracted 3% fewer dollars compared to the third quarter of 2006 with $1.42 billion raised in seven fewer deals (66).
The largest venture round of the quarter belonged to a spinal implants maker Globus Medical of Audubon, Penn., which raised $110 million in its first round of institutional investment, a Series E financing.
"There has been a pickup in the amounts health care companies are raising at exit and with 22 venture-backed health care companies already registered to go public in the next few months, it's clear that many venture capitalists see the time as now to invest in what is sure to be a very active health care market for some time," said Jessica Canning, Director of Global Research at VentureOne. "The first Baby Boomer just applied for Social Security and there are 76 million others lining up right behind her-and they will all need medical care."
The Business, Consumer & Retail area saw the largest up-tick in the third quarter with 77 deals raising $902 million, a 69% increase in dollars invested over the same period last year.
Information technology (IT), the largest investment area overall, saw 10% fewer deals and 5% fewer dollars invested than during the same period last year. The data showed that there were 367 completed venture rounds for IT companies, accounting for $3.77 billion. One notable point: 60% of IT deals (222) and 54% of IT investments ($2.74 billion) in the third quarter went to second and later rounds.
Within the IT category, the "information services" segment, which includes many of the current Web-related innovators, attracted $973 million in 114 deals in the third quarter. These totals were second only to the $974 million raised in 137 deals during the second quarter of this year. The second- largest venture capital deal of the quarter - the $104 million later round for Milford, Conn.-based Perimeter eSecurity - belonged to this segment.
Deal Sizes Continue to Grow
The quarterly report found that venture capital deals continue to get larger. In fact, in just two year's time, the median round size has grown 25%, from $6.3 million in the third quarter of 2005 to the record $7.9 million in the third quarter this year. By industry, healthcare financings had the largest median at $10 million, followed by the "Other" category, which includes the Energy and Advanced Specialty Materials & Chemicals sectors, at an all-time high of $9 million. The median size for an IT deal also set a record in the third quarter at $7.56 million.
By round class, seed and first-round financings made up 38% of overall deal flow in the quarter. Later-stage rounds accounted for 37% of all venture capital rounds and second rounds made up 22%.
Regional Perspectives
California dominated the venture capital activity in the third quarter, representing 44% of both the nation's deal flow and its capital invested. The report showed that, by major regions:
- The San Francisco Bay Area saw declines for the second quarter in a row, as deal flow fell 13% compared to the third quarter of 2006 to 196 deals completed; dollars invested dipped 8% to $2.52 billion.
- For the third quarter in a row, Southern California recorded higher investment totals than New England. With 78 completed financings in the third quarter, Southern California saw its greatest quarterly deal volume since 2001 and garnered $961.3 million in venture capital investment.
- The New England area saw a 28% increase in the amount of venture capital invested compared to the third quarter of 2006 with $849.1 million put to work in 76 completed financings.
- For the second quarter in a row, the New York metropolitan area saw a year-over-year increase in venture capital investment, with $672 million invested in the third quarter, up 17% from the same quarter of 2006. Deal flow, at 57, remained virtually unchanged.
