U.S. venture capital investing reached its highest point in 4 1/2 years with $6.73 billion directed to 619 deals, according to the Quarterly Venture Capital Report released by Ernst & Young LLP and VentureOne, the publisher of VentureSource. Overall deal count increased 3% from the second quarter of 2005, and the capital was 5% higher than a year ago, representing the most venture capital invested in a single quarter since the fourth quarter of 2001.
The increase was boosted by the highest infusion of capital in recent quarters in the market’s two major industry groups: health care and information technology. In fact, it was the most capital invested in information technology since 2004 and more significantly, the most invested in healthcare since 2000. Increased later stage funding was another important factor contributing to the overall rise in investment. One of the key emerging sectors in venture capital — the energy segment — also saw financing activity and investment increase significantly, driven mostly by alternative energy financings.
“A plethora of very promising and innovative life science companies and a public market climate that is supporting, at least moderately, health care IPOs over the past 2 ½ years, is generating this strong level of investment activity. Thus, it’s no surprise that health care investing, and in particular record-breaking investment in biopharmaceuticals, is surging ahead,” said Stephen Harmston, director of global research at VentureOne. “Confidence in the market is also apparent in the level of current venture capital fund raising—in which some particularly large funds are readying for deployment.”
Capital investment in health care companies increased 25% over the same quarter a year ago, reaching $2.24 billion in 160 rounds. The biopharmaceutical segment was the major driver of this with 80 deals and $1.45 billion invested, including eight of the top 12 deals posted this quarter. Of note, a number of those large deals included partnering investments from major pharmaceutical companies. The total investment in biopharmaceuticals was the most capital investment in the segment since VentureOne began tracking the data in 1992. The medical devices segment also had a strong quarter with 58 deals and $617.6 million, increases of 32% and 30% respectively, over the same quarter last year. While the health care category was responsible for a number of the largest deals, investors also funded 58 seed and first-round health care deals this quarter, up from 47 in the same quarter of last year. The median size of a health care deal was $8 million, down slightly from $8.2 million a year ago.
“This quarter’s financing activity shows that venture capital investors are oriented toward both providing their existing portfolio companies with the capital needed to exploit market opportunities and funding emerging sectors with exceptional growth potential,” said Joseph Muscat, Americas Director of the Ernst & Young Venture Capital Advisory Group. “The $3.22 billion directed toward later rounds, the most capital devoted to this round class since 2001, indicates that investors are not troubled by significant capital deployment into existing portfolio companies with strong prospects, mainly in the traditional health care and IT segments. At the same time, we see investors pursing early stage opportunities in areas of new innovation, most notably alternative energy.”
The growing interest in renewable sources of energy fueled increases in the alternative energy segment which had deal flow triple from a year ago to 15 and investments reach $239.1 million, a 290% increase. The energy category as a whole reached its highest level on record with $354.4 million invested in 25 deals. Of note, two of the largest deals this quarter were alternative energy investments: a $75 million later round for Nanosolar of Palo Alto, Calif., and a $50 million first round for Altra of Los Angeles, Calif.
While overshadowed by the health care data, information technology also posted significant activity in key areas. Overall deal count was steady at 363 and investment was up 2% over a year ago to $3.51 billion. Within the category, the information services segment posted a 76% increase in deal flow to 79 deals, and the capital rose 128% to $637 million. The electronics and computers segment also increased by five deals to 32, and the capital by 54% to $411.7 million invested. The software segment, which had 170 deals and $1.29 billion invested, was mostly steady with a year ago, as was the semiconductor segment, with 36 deals and $530.3 million. The communications and networking segment posted the only significant decline in IT with a 40% drop in capital and 22 fewer deals than the second quarter of 2005. The segment was home to the largest deal of the second quarter, the $130 million later round investment in Current Communications of Rochester, N.Y., which provides broadband over powerlines. Overall, the median size of an IT deal was $7.8 million, the highest IT median deal size since 2001.
In terms of round class, 38% of the quarter’s deals were later-stage rounds, receiving 48% of the capital. Seed and first-round deals made up 33% of the activity and 20% of the investment this quarter. Second round deals represented 22% of the deal flow and 23% of the capital. The $1.55 billion invested in second rounds was the most capital for this round class since 2002. In addition, $575.3 million was invested in 40 recapitalization rounds this quarter, the most ever to this round type.
By region, the San Francisco Bay Area remained the dominant market for venture capital investing, with 207 deals and $2.42 billion invested, increases of 8% and 13%, respectively, over the same quarter of last year. The New England region also posted a significant increase in capital, 22%, to $740.3 million, although deal flow was down by 11 deals. In Southern California, deal flow was steady but the dollars invested were down by 8%. The New York metropolitan area posted strong deal growth of 37%, but the amount invested in this region decreased by almost half from a year ago, to $595.4 million.
via E&Y
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