U.S. Venture Capital Investing in 2006 Posts a Five-Year High, Reaching $25.75 Billion, Highest Annual Investment Level Since 2001
Ernst & Young LLP and Dow Jones VentureOne Venture Capital Report Shows that 2006 Saw Significantly Increased Activity for Web, Medical Devices and Energy Investments
SAN FRANCISCO and NEW YORK, Jan. 22, 2007 -- Venture capital investment into U.S. headquartered companies continued its ascent in 2006 with the most annual deal flow and capital investment since 2001, according to the Quarterly Venture Capital Report released by Ernst & Young LLP and Dow Jones VentureOne, the publisher of the VentureSource database. In total, deal count reached 2,454 deals for the year, slightly ahead of 2005's level, and capital investment reached $25.75 billion, an 8% increase over the preceding year.
While 2006 activity is at a five-year high point, the fourth quarter of 2006 was the slowest quarter of the year with 561 deals and $5.82 billion invested, declines of 13% and 2% from the fourth quarter of 2005.
For the year as a whole, it was clear that significant interest in some key growing industries such as the Web-heavy information services industry, the medical devices and equipment industry and the alternative energy industry contributed greatly to the boost in investment in 2006.
"I think 2006 proved that the U.S. venture capital industry has entered a new cycle with many investors renewing their commitment to the entrepreneurial spirit by focusing attention and capital on companies that affect our health, the way we communicate, and the environment," said Stephen Harmston, Director of Global Research for VentureOne. "The data also shows that investors are recognizing the economic reality for start-ups today and are willing to sustain them with round sizes that are at the highest levels in six years."
Overall, the median round size in 2006 was $7 million, up from $6.5 million in 2005, and the highest annual median since 2000. For the second year in a row, investors also are focusing more than a third of activity on early-stage financings. Overall, seed- and first-round deals made up 36% of the deal flow in 2006; about the same concentration of deal flow went to later-stage deals.
"There was a nice balance of investment in 2006 with investors deploying significant amount of capital to later-stage portfolio companies, but also supporting the emerging class of start-ups," said Joseph Muscat, Americas Director of the Ernst & Young Venture Capital Advisory Group. "The expanding opportunities for venture-backed companies to achieve liquidity through an initial public offering, merger or acquisition are having an impact. It was a relatively strong year for these transactions with investors recognizing the need to support their companies for as long as six years before they can achieve a successful exit."
By industry, deal flow and capital investment into health care companies showed the most significant increases in 2006. Health care deal flow was up 5% over 2005 to 628 deals and capital investment for the industry was up 12% to $8.25 billion. One of the largest deals of the fourth quarter, and among the largest deals of the year, was the $100 million later round for biopharmaceutical company Kalypsys of San Diego, Calif., a developer of small molecule drugs. Within the health care industry, the medical devices and equipment segment was particularly strong with 239 deals and $2.63 billion invested, which is 20 more deals than in 2005 and the most capital invested in this segment on record. The median size of a health care deal was $8 million in 2006, about the same as last year.
Driven by U.S. investors' increasing interest, there was significant deal flow and investment in alternative energy companies. Deal flow more than doubled to 41 deals this year and the capital investment increased 190% to $537.6 million.
The information technology industry posted gains in key segments, although overall deal count was down by 21 deals from the previous year. But capital invested in IT overall increased 2% to $13.76 billion, the most money deployed in technology companies since 2001. The increase was significantly boosted by investment in the information services segment, which saw the most activity since 2000, and is home to much of the Web 2.0 companies that have been attracting investors attention. Overall information services deal flow rose 35% to 321 financing rounds in 2006. Capital directed here was $2.41 billion, an increase of 27% from 2005.
The largest deal of 2006 was a technology deal, the $150 million second round for communications company Amp'd Mobile of Los Angeles, Calif., a mobile entertainment services provider.
Investment in business, consumer and retail products and services companies also increased over last year, with a total of 274 deals and $2.63 billion in capital. This included one of the largest deals of the fourth quarter, a $100 million later-stage investment to HomeAway of Austin, Texas, an online vacation rental listing service.
From a regional perspective California has become the top spot for venture capital investment in 2006: with 1,082 deals and $12.36 billion invested, it is responsible for almost half the deal flow and investment nationwide. Southern California has grown in particular, led by increased investment in health care and information services companies. For the first year ever, capital investment in Southern California surpassed the total amount invested in New England in 2006. Overall, Southern California deal flow was up slightly for the year to 239 deals along with a significant increase in capital, 25%, to $3.11 billion. The San Francisco Bay area remained the predominant market for venture capital investing, with 811 deals and $9.05 billion invested, steady deal flow with 2005 and a 7% increase in capital.
In other regions nationwide, New England received the second most number of deals, behind only the San Francisco Bay Area, but its annual deal flow and investment was down 3% and 2%, respectively in 2006. The New York metropolitan region saw an increase in deal flow to 182 deals, but capital was down 5% to $2.09 billion. Deal flow was also down in the Potomac region and in Texas, but both of these regions received substantially more capital investment than last year: a 25% increase in the Potomac region and a 17% increase in Texas. Capital investment climbed 29% in Washington State, to $1.07 billion for the year, with nine more deals completed.
The investment figures included in this release are based on aggregate findings of VentureOne's proprietary U.S. research and are contained in VentureSource. This data was collected by surveying professional venture capital firms, through in-depth interviews with company CEOs and CFOs, and from secondary sources. These venture capital statistics are for equity investments into early stage, innovative companies and do not include companies receiving funding solely from corporate, individual, and/or government investors. No statement herein is to be construed as a recommendation to buy or sell securities or to provide investment advice.
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Dow Jones VentureOne (www.ventureone.com and www.venturecapital.dowjones.com), a unit of Dow Jones Financial Information Services, has been the leading provider of finance and investment data to the venture capital industry for almost 20 years. Dow Jones VentureSource, a sophisticated electronic database on the venture capital industry, is published by VentureOne.
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