VentureBeat

[Updated with VentureOne/Ernst & Young data, which shows investing increased significantly during the quarter]

Venture capitalists invested robustly during the third quarter, at or near record levels since 2001, according to two surveys released last night.

So all is OK on the investing side, even if the venture capital firms themselves are showing signs of pain. Friday, news spread of yet another venture capital firm that has put its fund-raising plans on hold, because investors found its results too mediocre to justify reinvesting. The firm, Sequel Venture Partners, of Boulder, Colo, invests in health care and technology.

Venture capitalists invested $7.1 billion during the third quarter, comfortably above levels of the same quarter last year, but showing a slight drop off from $7.3 million or so pace set in the first two quarters of this year, according to data published by PricewaterhouseCoopers, the National Venture Capital Association and Thomson Financial.

This was followed by data from VentureOne and Ernst & Young, which shows a more robust investment picture. Venture capitalists invested $8.1 billion the third quarter, up from strongly from $7.5 billion in the second quarter, and $6.3 billion the same quarter a year ago, according that survey. It was the ninth straight quarterly increase, and the highest since 2001.

The quarter saw notable increases in both the clean-tech and internet companies.

Software and life sciences remain the most heavily funded sectors, with $1.11 billion and $1.9 billion, respectively, according to the NVCA/PwC/Thomson survey. Clean-tech, however continues to draw more interest, with $844 million in investment, or an 80 percent increase compared to the second quarter of the year. Three of the top five deals this quarter were in clean-tech.

The whopper was GreatPoint Energy, of Cambridge, Mass, which raised $100 million — one of the largest deals ever for the sector. It converts coal and biogass into clean natural gas (see our coverage of the deal, announced last month), and is backed big-name investors Kleiner Perkins, Khosla Ventures and Draper Fisher Jurvetson. The only company raising more than GreatPoint was Globus Medical, which raised $110 million.

Looking more closely at the NVCA/PwC/Thomson survey, here’s a full list of the top deals for the first quarter: Download Excel file.

Silicon Valley had the most deals, as usual. For a full list of all of the Silicon Valley company fundings, by company, investors, amounts, sector, location, and stage, see this detailed file (downloads Excel). Here’s a slide show of national trends (downloads pdf), and the detailed numbers are here (Excel file).

The year is still on pace to be the biggest year for venture investments since 2001.

Internet companies got $1.1 billion, a 17 percent increase in dollars over the second quarter. Media and entertainment was hot too, with $509 million compared to $464 million in the second quarter.

The dollar value of first time deals (companies receiving venture capital for the first time) was $ 1.7 billion, which remains high compared to last year. However, seed deals in the third quarter fell 15 percent to $1.4 billion compared to the second quarter.

Updated

New Internet technologies, defined vaguely as “Web 2.0,” have gone mainstream, but the cycle of innovation may be slowing, suggests a venture capitalist.

Separately, data shows that venture investments in Web 2.0 companies last year increased strongly, but that valuations actually dropped.

Peter Rip, of Crosslink Capital, who has invested in several Internet companies considered Web 2.0-focused, including Riya, Vast and Teqlo, posits that one way to check the “energy dissipation” around Web 2.0 is to look at Web 2.0-centric media, including Techcrunch, Gigaom, and Technorati.

All three of these properties show a similar falloff in reach from their Q4 peaks, all notably right around the Web 2.0 Conference, he notes, pointing to graphs from traffic-measuring service Alexa.

Peter’s post is here. He suggests the early easy wins by new companies targeting Web 2.0 have been had. Now that Web 2.0 has gone mainstream, the hard work begins.

The real debate takes place in comments on Peter post, which he has already shut down.

Of course, Alexa data is notoriously unreliable.

Update: Another controversy is how Web 2.0 is defined. One good definition has been produced by VentureOne and Ernst & Young (we wrote about their definition here).

Today, the two released their latest report, which shows venture capitalists more than doubled their investments in this area last year (see table below), but that the valuation they placed on these companies actually dropped. On its face, this suggests a cooling in the hype around the sector. However, the value drop may stem from other factors. For example, investors may be having to find and invest in Web 2.0 companies earlier in their cycle, because the companies need fewer overall dollars to grow– and so bypass taking capital later on. That means the value of the companies is lower at the time of the investment, but doesn’t necessarily mean a cooling off of interest. Indeed, many investors we’ve talked with say valuations are higher than ever, once you factor in how early these companies are in their traction.

Update II:

VentureOne and Ernst & Young have released a very useful table of Web 2.0 investments and their details here (download Excel file)

And here is a ranking of the most active venture capital investors in this latest cycle (more detailed info here; downloads Excel file)

Venture capital investment into U.S. companies slowed markedly in fourth quarter of last year, to the slowest pace in two years.

That drop-off wasn’t enough to knock 2006 from its status as most robust year since 2001, however — and it’s too early too tell whether the slow-down will continue into this year.
For all of 2006, investors backed 2,454 companies, slightly ahead of 2005’s level. Total investment was $25.75 billion, an 8 percent increase over the preceding year, according to the quarterly survey by Ernst & Young and Dow Jones VentureOne.

The surprise is the fourth quarter, when VCs backed 561 deals and invest $5.82 billion, drops of 13 percent and 2 percent, respectively, from the fourth quarter of 2005.

This comes at the same time venture capital firms slowed their own fund-raising from their investors to the slowest pace in three years, according to Thomson Financial data released last week.

Trends in Silicon Valley reflected the slowdown seen in the rest of the nation. VCs invested $1.94 billion in local companies, down from $2.12 billion the same quarter of 2005.

See diagram below, which suggests the interactive Web companies (dubbed Web 2.0) were among the few sectors to grab more money in the fourth quarter compared to the third quarter. The classifications aren’t perfect, but see “consumer/business services” and “media/content”, for example.

But if you stand back, and look at 2006 year as a whole, investments increased across each of the three main industries tracked (a) healthcare, (b) IT and (c) consumer and business products and services, so this a broad recovery. Within IT, though investments fell in the sub-category of chips.

The clear winner was alternative energy, where investments boomed 190 percent, compared to the year before.

Highlights:
–Healthcare in 2006 — 628 companies were invested in; 5% increase from 2005
–11.3% drop in communication & networking in 2006
–14% increase in electronics & computing
–27.5% increase in information systems
–6.6% drop in semiconductors
–1.8% increase in software
–Alternative Energy in 2006 - $537.6 million in 41 companies; 190% increase from 2005

The biggest deals are listed in a table at bottom.

Meanwhile, data suggests that less money can sometimes be better, according to the number-crunchers at Bridgescale, a new Silicon Valley venture firm (see our story here). The firm used VentureOne statistics and other sources to track IPOs and mergers and acquistions. Companies funded by angels initially take in three rounds of venture capital, on average, instead of four, they found. This suggests these angel-backed companies are more efficient. Indeed, these angel-backed companies ended up taking $15 million less money from investors than other companies did before their exits — or $50 million, versus $65 million. Finally, these companies accounted for $700 million in total investments, but led to $10 billion in exit value, a 15-fold return, Bridgescale found. That compares to $2 billion invested, and a $13 billion exit value for other companies, or a 6-fold return.