Venture Capital: Investment deals soar to highest level in five years

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Venture capitalists invested $25.5 billion in 3,416 deals in 2006, a 10 percent increase in deal volume and a 12 percent increase in dollar value from the previous year, according to The MoneyTree™ Report by Price Waterhouse Coopers and the National Venture Capital Association. The report, based on data from Thomson Financial, notes that the 2006 figures mark the highest level of investment since 2001. Quarterly investment levels remained steady in the $5 billion to $6 billion range, as the venture industry invested in the traditional technology and life sciences sectors and began a deliberate foray into the energy sector, it said.

The year 2006 was characterized by significant growth in the life sciences sector, with investment in biotechnology and medical devices reaching record-high levels. Other areas of growth included media/ entertainment, energy and Internet-specific companies. Seed and early-stage companies received more financing and dollars in 2006 but the largest gains were in expansion-stage deals. First-time financings reached the highest level since 2001. Investments in the fourth quarter of 2006 totaled $5.7 billion in 802 deals, down from $6.6 billion in the third quarter of 2006, but were well within the $4.3 billion to $6.9 billion ranges of investments seen over the past five years.

Sector and Industry Analysis
The life sciences sector set the pace for investing in 2006, with $7.2 billion in 731 deals compared with $6.0 billion going into 647 deals in 2005. The increase was driven equally by significant increases in the biotechnology and medical device sectors, both of which had record high levels in 2006. For the year, life sciences accounted for 28 percent of all venture capital invested. Life sciences was also the number-one investment sector for 2006.

Investment in the software sector remained relatively flat in 2006, with $5.0 billion going into 865 deals compared with $4.8 billion going into 869 deals in 2005, but software still remained the largest single industry sector for the year and the fourth quarter in terms of both deals and dollars. The industrial/energy sector experienced a sharp gain of more than 107 percent in dollars invested in 2006, with 183 companies receiving $1.8 billion, compared with 136 companies in 2005 receiving $851 million. The alternative energy subsector accounted for 40 percent of the dollars invested in this category.
Media and entertainment saw more venture capital dollars in 2006, with $1.6 billion going into 299 deals compared with 2005, when $1 billion went into 180 deals. Telecom companies also saw an increase, with 294 deals getting $2.6 billion in 2006 compared with 263 deals receiving $2.5 billion in 2005. The wireless subsector accounted for 44 percent of the telecom sector in terms of dollars, with 128 deals garnering $1.2 billion during 2006. Internet-specific companies received $4.0 billion in 645 deals in 2006, a notable increase over 2005, when these companies received $3.2 billion in 494 deals. These deals accounted for 16 percent of all venture capital dollars in 2006.

Other major industry categories that experienced increases in dollars were electronics-instrumentation, business products and services, and consumer products and services. The year saw decreases for networking and equipment, computers and peripherals, and financial services.

First-time financings increased in deals and dollars to the highest levels since 2001, with 1,093 companies receiving $5.8 billion in venture capital for the first time. The top industries for first-time financing growth in 2006 were software, with 234 deals valued at $1.2 billion, followed by biotechnology, with 127 deals for $773 million. Seventy percent of first time financings in 2006 were in the seed or early stage of development, followed by expansion-stage companies at 23 percent and later-stage companies at 7 percent.