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Second Quarter 2007: Venture Capital Summary

venture capital chartVenture capital is often the oxygen that gives life to early stage startups.  It’s the money that funds research and development; the money that pays salaries before a company becomes cash flow positive.  Accordingly, metrics which show the performance of the venture industry are often a useful barometer for the rate of entrepreneurship and state of new industries, not to mention a broader indicator of economic optimism.

Earlier this week Ernst & Young and Dow JonesVentureOne released their summary survey of U.S. Venture Capital Investments through the second quarter of 2007.  The numbers were generally good.  They show investments continuing their rebound from their 2003 low point.

For the second quarter of 2007, total investment placements were up 8% to $7.4b with 717 companies receiving funding, the highest deal volume in six years (since 2001).  

Among industry segments, Information Technology was the strongest performer with $4.1b placed and 435 deals.  Software accounted for $1.5b and 171 of those.   The Information Services category, which includes many Web 2.0 companies, had its strongest showing ever with $979m placed across 131 deals.

Across the industry, the trend was toward later stage and larger sized deals.  Median deal size was $8m, the highest since 2000.  That makes sense given the large pools of capital still under management, and the time burden involved in managing each deal.   Partners in venture funds are more apt to look for a handful of larger deals that require larger amounts of capital but can be more easily managed than to spread themselves too thin across a basket of lower cost offerings that due to volume, they can’t watch as closely.   

Additionally, the increase in late stage rounds suggests there were more investments in support (or follow-on) rounds to provide additional capital for companies financed in prior years that either need more money for expansion or are not yet ready for public offering or acquisition.  That’s appropriate given the market for potential exits, notably IPOs, is not incredibly strong right now.

In actual numbers 36% of deal flow was early stage which was defined as seed or first rounds (254 deals).  Later stage deals, which is its own category in the survey,  also accounted for 36% of investments (253 deals).  Second round financings represented 23% of transactions (160 deals). 

Geographically, Silicon Valley and the greater San Francisco Bay Area lead the overall deal flow with 208 deals and $2.5b invested.  The North East region closed 158 deals totaling approximately $1.5b.   Southern California finished the quarter with 76 deals totaling near $1b invested.

Within geographic regions, numbers were up and down a bit relative to 2006 but the overall results were the 9th successive quarter of growth for the industry.  The attached chart, which will enlarge with a mouse click, shows a breakdown of the annual deal flow since 2001 by both total capital investment and volume of transactions.  As the data shows – the industry has continued to recover well (as measured by capital placements and not Return on investments (ROI) since hitting a bottom in 2003.)

(Note: for comparison and consistency in the chart the data for 2007 is estimated by simply expanding the first two quarters of data by a factor of two to yield a full years worth or results. Stories about some of the deals in the media entertainment and technology sector can be found in the Metue category for venture financings )


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