Silicon Valley Watcher - Former FT journalist Tom Foremski reporting from the intersection of technology and media

VCs Invest Record Amounts but Rush Towards The Exits

Posted by Tom Foremski - April 24, 2007

Foremski's Take: Here's my topline analysis on the VC investment figures just released for Q1 2007.

VC funding is up but most of it is crowding into later stage financing. The early stage financing has fallen, which shows that the VC funds have become much more conservative and risk averse--exactly what Paul Kedrosky has been saying for some time.

The spin from the VC community is that VC funding has "broken out" to its highest level since the dark quarters of the dotbomb years, in 2001. But early stage funding has dropped significantly and if that continues that is very bad for the next crop of startups.

Have the VC funds been scared off by the lack of decent investment opportunities? Maybe. I wouldn't blame them for looking at many Web 2.0 companies and walking past the window decorations. 

Money is shifting from IT and into life sciences and clean tech. Biotech is not doing well, medical devices are doing very well, clean tech has dropped a bit but the 12 month rolling average looks good for many sectors.

[Whenever the statisticians resolve to 12-month or five year, or in the case of the chip industry 40-year rolling averages (because the chip industry can...) you have to nod and wonder if there might be some other factors in play.]

Take a look tell me what you see in these tea leaves :-)

(This is some of the raw material that is provided to journalists...)

Here is the webcast, highlights, and the media release:

 

Digitized Replay: Scheduled to begin on:  4/23/07 at 08:00P   end on:
4/30/07 at 11:59P (TZ: Eastern)
Telephone: (800) 475-6701
International: (320) 365-3844
Access Code: 870374
Web URL -- http://www.pwc.com/webcast
Web Password - MoneyTree0407
Note that the password is case-sensitive and there is no space between
the letters and numerals.

Highlights from the conference call:

 

Darrell Pinto, director of Global Private Equity Performance, Thomson
Financial
*       "The range of quarterly investments over the last five years,
have fluctuated between roughly $5-7 billion, so this quarter marks the
first breakout from that range since the dot-com era."
*       "Investments into later stage companies experienced the most
significant growth, with $3 billion invested in the first quarter. This
represents a staggering 57 percent increase over the previous quarter
and a 12 percent increase from the same quarter of last year."
*        "The real story this quarter pivots on Life Sciences with $2.6
billion invested in 198 deals.  Biotechnology companies received the
lion's share of this with $1.5 billion invested, ranking it as the
number one industry for investment this quarter."
Tracy Lefteroff, global managing partner, Private Equity & Venture
Capital and Life Sciences Industry Services, PwC:
*       "While Software experienced a 10 percent decrease from the last
quarter in investment dollars and a roughly 10 percent decline in deals,
it was still a close second to the Biotech industry."
*       "While we look at two other sectors, the Internet-specific and
Clean Tech investment sectors, I think you can see that the venture
industry is still showing strong interest in Web 2.0 companies with
quarterly investing at the highest level in five years."
*       "Quarterly investments in this space [clean tech] have continued
to exceed the $250 million mark in four out of the last five quarters,
which is more than double the quarterly average amount from 2000-2005.
And looking out, we don't expect this pace to decrease, given the level
of interest in this new sector."
John Taylor, vice president of Research, NVCA:
*       "We have the highest dollar amount in 21 quarters and yet the
lowest deal count in a few quarters here, so that suggests a higher
average investment per deal.  You actually have to go back to the second
quarter of 2001 to find a higher average per deal."
*       "You can see in 2004, as well as now in the first quarter of
2007, the lower number of first-time deals, and in those cases, both
2004 and first quarter of 2007, we actually had some good news in the
IPO markets.  Perhaps there's a correlation, that as IPO markets
strengthen, the venture capitalists are more focused on the existing
projects."
*       "Regardless of whether the number of first time investments is
up a little or down a little, the point is that the venture capital
industry found 223 new companies that were very invest-able that they
chose to make a commitment to this quarter."
Ullas Naik, managing director, Globespan Capital Partners:
*       "Open source projects continue to garner a fair amount of
interest because people view open source code as being a much cheaper
alternative to existing proprietary software."
Garheng Kong, general partner, Intersouth Partners:
*       "From the financing side, the interest in investing in companies
is also supplied by large venture funds that have been raised in the
last year or two that have capacity and the interest to take these
drugs, take these medical devices, a little bit farther in development.
So, what used to be an earlier stage milestone and may not be quite as
far in development because of limitation on capital is no longer the
case - and these biopharmaceutical and medical device companies can take
more capital and go down farther and hopefully receive a larger exit
premium by these corporate partners."

 

Here is the release:

 

VENTURE CAPITAL INVESTMENT SURPASSES $7 BILLION IN Q1 2007; REACHES
HIGHEST QUARTERLY LEVEL IN FIVE YEARS
Life Sciences and Later Stage Investing Soars in Quarter
Washington, D.C., April 24, 2007 - In the first quarter of 2007, venture
capitalists invested $7.1 billion into 778 deals, the highest quarterly
dollar amount since the fourth quarter of 2001, according to the
MoneyTree Report by PricewaterhouseCoopers and the National Venture
Capital Association based on data by Thomson Financial. Deal volume
actually declined in the quarter compared with the fourth quarter of
2006, indicating venture capitalists' willingness to put more dollars
into each round.


The Life Sciences sector had an extremely strong quarter, with
Biotechnology ranking as the number one industry for investment, while
Medical Devices was at an all-time high.   Later Stage investing also
jumped in the quarter to the highest dollar level since the fourth
quarter of 2000.  First time financings remained relatively steady,
increasing slightly over last quarter.


Tracy Lefteroff, global managing partner of the venture capital practice
at PricewaterhouseCoopers, observed, "This quarter, the breadth of
investing in a wide variety of industry segments and in companies across
varying stages of maturity indicates a healthy balance between short-
and long-term opportunities.  We're seeing solid levels of investing in
traditional industries that are being complemented by renewed interest
in promising, fast-growing niches. Entrepreneurs in any area can look
forward to a more receptive -- though no less demanding -- market for
their ideas."


And Mark Heesen, president of the National Venture Capital Association,
added, "As investment levels inch upwards, it is important to watch
where the money is going. The Life Sciences sector is receiving a lot of
attention right now but it is an industry that is indeed scalable.
Biotech and medical device companies require a substantial amount of
capital to get through the regulatory process and the VC industry is
responding to this demand. The quarterly increase in later stage
investing may be reflective of an improving exit market as venture
capitalists are now willing to invest an additional later stage round
with the hopes that an IPO or a robust acquisition is around the corner.
"
Sector and Industry Analysis
Medical Device investing skyrocketed to an all-time high in the first
quarter, with $1.08 billion going into 96 deals, a 60 percent increase
in dollars over Q4 2006.  Biotechnology was the single largest industry
sector with $1.5 billion going into 102 deals, unseating software, which
is traditionally the largest sector.  Life Sciences (Biotechnology and
Medical Devices together) accounted for 36 percent of the quarter's
dollars, an all-time high.


Software investments fell 10 percent from Q1 of 2006 to $1.1 billion
into 193 deals in Q1 2007.  The decrease can be attributed to lower deal
volume.  However, Software still had the highest deal level of all
industries and was the second largest industry sector for dollar value
this quarter.


The Media and Entertainment sector increased 16 percent in dollars to
$489 million into 72 deals.  Telecommunications increased 27 percent in
dollars over Q4 2006 with $588 million going into 63 deals.  Within the
Telecom sector, Wireless Communications captured $356 million for the
quarter.


Internet-specific companies captured $1.3 billion going into 167 deals,
a 31 percent increase in investment dollars over Q4 2006 and the highest
quarterly level in five years.  However, the number of Internet-specific
deals decreased since the fourth quarter indicating more dollars being
invested in each round. 'Internet-specific' is a discrete classification
assigned to a company whose business model is fundamentally dependent on
the Internet, regardless of the company's primary industry category such
as Software or Telecommunications.


A new Clean Tech category, which crosses traditional MoneyTree sectors
and comprises alternative energy, pollution and recycling, power
supplies and conservation will be reported going forward.  In the first
quarter, venture capitalists invested $264 million into 23 deals in the
Clean Tech category, a 41 percent increase in dollar value over the
fourth quarter.  For the full year 2006, Clean Tech investments were
$1.5 billion or an average of $383 million per quarter.


Other major industry categories that experienced dollar increases in Q1
2007 include IT Services, Networking and Equipment,
Retailing/Distribution, Industrial/Energy, Electronics/Instrumentation,
and Computers/Peripherals.  Other industries experiencing declines were
Semiconductors and Consumer Products.


Stage of Development and 12-Month Average Valuations
Investments in Later Stage companies increased significantly in the
first quarter of 2007 with $3.0 billion going into 245 deals.  This was
the highest dollar level in over six years.  Average post-money
valuations were $95.33 million for the 12-month period ending Q4 2006.
(Note: Valuation data lags investment data by one quarter and is as of
April 16, 2007.)


Funding dollars for Seed and Early Stage companies declined 30 percent
in Q1 to $1.1 billion in 259 companies, a 26 percent decline in deals.
Average post-money valuations of Early Stage companies were $11.13
million for the 12 months ending Q4 2006.


Investments in Expansion Stage companies experienced a modest dollar
increase in Q1, rising nearly 9 percent to $2.9 billion invested into
274 deals.  The average post-money valuation for an Expansion Stage
company was $68.9 million for the full-year 2006.


Overall for Q1 the number of deals was spread relatively evenly among
the stages.  Seed/Early Stage companies accounted for 33 percent of the
deal volume; Expansion Stage for 35 percent; and Later Stage for 32
percent.


First-Time Financings
Fewer companies received funding for the first-time in Q1 2007 compared
with the previous quarter. However, the dollar value of the rounds was
collectively higher.   A total $1.5 billion went into 223 deals this
quarter compared with $1.4 billion going into 266 deals in Q4 2006.
Seed/Early Stage deals continued to represent the bulk of first-time
deals and dollars with 72 percent and 48 percent of the total,
respectively, which is in line with historical norms.


Software companies continued to attract the most first-time deals at 48
followed by Media and Entertainment companies at 31 and Medical Devices
& Equipment at 27.  Another industry sector where venture capitalists
placed more bets this quarter was Industrial/Energy.


International Investing
In the first quarter of 2007, U.S.-based venture capitalists invested
$137 million into 18 deals in China and just $83 million into 2 deals in
India.  Both countries had slower quarters than those seen in 2006.
These figures are reported separately and are not included in the
aggregate totals above.

 

MoneyTree Report results are available online at www.pwcmoneytree.com
<http://www.pwcmoneytree.com/>  and www.nvca.org <http://www.nvca.org/>
.

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