InterWest News
Q2 VC Funding Hit $6.3B
Second report confirms venture investments in the second quarter reached a four-year high.
July 25, 2006
Venture capital investing in the United States reached its highest level since 2002 at $6.3 billion, according to a report released Tuesday.
The National Venture Capital Association (NVCA) and PricewaterhouseCoopers (PwC) produced estimates of second-quarter venture financing deals, a day after Ernst & Young LLP and Dow Jones VentureOne released their own report (see VC Investing Hits 4-Year High and Regions See VC Spending Swing). The NVCA data, while varying from Monday's estimates, confirmed that investment activity has reached a four-year high.
The NVCA-PwC report, known as the MoneyTree report, was based on data from Thomson Financial. It found that venture investing grew to $6.3 billion in 856 deals, a 2 percent increase in dollar terms and a 5 percent increase in deals from the prior quarter. The Ernst & Young and Dow Jones VentureOne report estimated that VCs had dedicated $6.73 billion to 619 deals, a 3 percent rise in deal count from the year-ago quarter and a 5 percent rise in capital.
The NVCA-PwC report saw the greatest strength came in the biotechnology, industrial/energy, and networking/equipment sectors.
Seed and early-stage deals and expansion-stage dollars showed the most growth from the first quarter. First-time financing deals reached a five-year high. But that growth seemed to take a toll on later-stage investments.
"This is the first time in four years where we've seen a step up from first to second quarter where the actual increase in the earlier rounds, specifically the seed and early, actually comes at the expense of the later deals," said John Taylor, vice president of research at the NVCA.
Expansion-stage investments increased by 17 percent to $2.9 billion, and the number of first-sequence deals rose by 18 percent from the first quarter to 282, marking a five-year high, according to Darrell Pinto, director of global private equity performance at Thomson Financial.
"All in all, the finds are that the U.S. VC market is showing steady signs of health and that VCs have a slowly improving appetite for new ideas," said Mr. Pinto.
Biotech Booms
One of the most robust sectors was life sciences, under which the report included both the biotech and medical device industries. That sector saw a 10 percent rise to $1.8 billion across 185 deals.
Also in the second quarter, the biotech sector received 34 percent more dollars than in the first quarter and an all-time high for the report of 112 deals.
However, the increase in biotech investing was offset by a decrease in funding for medical device companies. Those investments fell 22 percent to $549 million in Q2.
"Biotech rebounded in a major way in Q2 of 2006 after experiencing a significant drop last quarter," said Tracy Lefteroff, PwC's global managing partner of private equity and VC and life sciences industry services.
"Within the biotech sector, there was more than double the number of startup and seed companies receiving funding as in the last quarter," he added. "They received more than triple the amount from Q1 to Q2."
However, investment in software companies declined in the second quarter, with $1.3 billion going to 231 deals. Still, software represented the largest single investment category, with 20 percent of the total dollars and 27 percent of all deals.
Energy and Industry
Meanwhile the industrial and energy sector experienced a 62 percent increase in dollars, with $417 million going into 46 companies for a five-year high.
Most of that increase went to alternative energy companies. They received 69 percent more dollars than in Q1 and nearly quadrupled the number of deals.
Networking and equipment grew strongly over the course of the quarter, increasing 45 percent over Q1 in dollar terms and 60 percent in deals.
Internet-specific companies captured $916 million in 143 deals in Q2. But those figures were relatively flat compared to Q1, with about 14 percent of total investment.
The telecommunications sector also remained flat in Q2, but that was better than the decline it saw in Q1. However, wireless investments continued to decline in dollar terms, although the number of deals rose a bit, by 17 percent.
The electronics and instrumentation sector rose 17 percent in Q2 over Q1, and the semiconductors segment rose 15 percent.
Regional Investment Activity
In terms of regional differences, Gil Kliman, a general partner at InterWest Partners, based in Menlo Park, California, said he sees a lot of activity on the West Coast.
"There's a lot of biotech here in San Diego and medical devices in Orange County," he said.
Mr. Taylor of the NVCA noted that, in the past several quarters, "California's share of the pie" has gone from the low 40s percentile to the high 40s and is now hovering just under 50 percent.
The report did not cover investments outside the U.S., but Mr. Kliman noted that his firm has some investments outside the U.S., such as Aspreva, which is based in Victoria, Canada.
Rob Ketterson, a managing partner at Fidelity Ventures, said his Boston-based firm invests in Europe and has an office in London.
"There are some extremely high-quality companies in Europe and a lot of central European activity," he said. "We're seeing some of the entrepreneurs or their startups have returned to their home country."