Venture capitalists open spigot — especially for Web 2.0 & energy

Updated

For the third quarter in a row, U.S. venture capitalists poured more money into private companies than they did last year. They invested $6.36 billion in the third quarter, five percent more than last year. They backed 611 companies, two percent more.

These are the findings of the latest report by Dow Jones VentureOne and Ernst & Young.

The third quarter investment levels were slightly lower than the second quarter, but dips are common in the third quarter, when summer can often slow dealmaking.

Overall, the levels are more robust than any time since the post-Bubble trough in 2001. It is the first time since then we’ve had three consecutive quarters in which investments exceeded $6 billion.

Factors contributing to this trend include the robust merger and acquisition market and the positive results of recent technology IPOs, the survey said. These give venture capitalists a way to “exit” their investments profitably, and encourage them to invest more.

Deal flow in alternative energy more than tripled from a year ago, and the “information services segment,” which includes Web 2.0 companies, saw 41 percent more deals than in the third quarter of 2005, the survey said.

More early-stage financings were done, too, perhaps driven by the more than $35 billion in new venture capital funds raised over the past 18 months, the survey said.

In the third quarter, 38 percent of all VC deals were seed or first-round deals, the highest allocation percentage this year. However, this activity was stronger in healthcare, where 44 percent of the deals were early stage, than in the information technology segment, where only 32 percent of the deals were early stage. The following gives you some idea where the latest action is: In the specific IT sub-sector of “information services,” which includes Web 2.0, some 61 percent of the deals were seed and first round deals. In energy, 79 percent of the deals were in these early stages.

However, it is important to note the overall dollar amounts being pumped into these Internet companies is relatively small. There’s a lot of early-stage experimentation in Internet companies, but companies in other sectors are pulling in bigger dollar amounts.

Venture capitalists pumped $1.16 billion into “biopharmaceutical” companies, for example, or 9 percent more from the $1.27 billion during the same quarter a year ago. Information services companies pulled in $491 million, and that’s actually down from $538 million the same quarter before.