VC investing hits 6-year high in 2007, semi funding declines

Investments into life sciences and clean technology companies reached a record level last year, while software companies received the most dollars in first-time financings with 250 deals valued at $1.14 billion being funded.

By Ann Steffora Mutschler, Senior Editor -- Electronic Business, 1/25/2008

Marking the highest yearly investment total since 2001, US venture capitalists invested $29.4 billion in 3,813 deals in 2007, representing a 10.8% increase in dollars and a 5% increase in deal volume over 2006, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Financial.

Q4 2007 investments totaled $7 billion in 963 deals, marking the fourth straight quarter with investments totaling more than $7 billion – a phenomenon not seen since 2001, the company said.

Much of the increase over the prior year are being attributed to investments in the clean technology and life sciences sectors along with strong investment levels in Internet-specific companies. 

Seed and early-stage companies received more dollars in 2007, but later stage investments experienced the most dramatic increase during the year, while first-time financings reached a 6-year high as venture capitalists placed more initial bets in companies across multiple sectors. 

“The annual increase in venture capital investment in 2007 was extremely rational as the industry is now investing in a mix of sectors that is much more capital intensive than it has been in the past.  And despite the capital needs of industries such as clean technology and life sciences, we only saw a single digit increase in deal volume which suggests that a fair amount of discipline is being applied to investment decisions.  We are hopeful that this prudent investing will continue as the promise of innovation across all sectors is at an all time high,” explained Mark Heesen, president of the National Venture Capital Association, in a statement.

The life sciences sector which includes biotechnology and medical device industries together set an all-time record for venture capital investing in 2007 with $9.1 billion in 862 deals, compared to $7.6 billion going into 786 deals in 2006.

While both industries experienced double-digit increases over the prior year, the most significant growth was seen in the medical device industry, which rose 40% in 2007 to $3.9 billion going into 385 deals, PricewaterhouseCoopers reported.

For the year, life sciences accounted for 31% of all venture capital invested, which also represents an all-time high.  Life sciences also retained its position as the number one investment sector for 2007.

Software investing remained relatively flat in 2007, consistent with levels over the last five years with $5.3 billion going into 905 deals, compared to $5.1 billion going into 920 deals in 2006.  Despite the lack of growth, it still remained the largest single industry category for the year both in terms of deals and dollars, edging out biotechnology for the top position, the company noted.

The clean technology sector, which includes alternative energy, pollution and recycling, power supplies and conservation, represented 2 of the 5 biggest deals of the year and experienced significant growth in 2007 with $2.2 billion invested in 202 deals, representing a 47% growth in dollars and a 58% growth in deal volume over 2006 when $1.5 billion was invested in 128 companies.

Internet-specific companies received $4.6 billion in 748 deals in 2007, an increase of 12% and 8%, respectively, over 2006 when these companies received $4.1 billion in 691 deals. 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. These companies accounted for 16% of all venture capital dollars in 2007, approximately the same percentage as in 2006.

The media and entertainment industry saw more venture capital dollars in 2007, with $1.9 billion going into 340 deals compared to 2006 when $1.7 billion went into 318 deals. Other industries that saw increases in deals and dollars during the year include business products and services, financial services, IT services, and retailing/distribution.  .

Telecom companies saw a decrease in investment in 2007 with 290 deals receiving $2.1 billion dollars, a drop from the $2.6 billion in 301 deals they captured in 2006. Other industries that experienced declines in deals and dollars in 2007 include healthcare services, semiconductors, and electronics/instrumentation.

In terms of the stage of development in which funding occurred, investments into later stage companies increased substantially, both in terms of deals and dollars in 2007, PricewaterhouseCoopers reported.  Venture capitalists placed $12.2 billion in 1,168 later stage deals during the year, compared to $9.8 billion in 1,006 deals in 2006, which accounted for 31% of all deals in 2007, compared to 28% in 2006.

Funding for seed stage companies remained level in terms of dollars but increased significantly in deal volume in 2007 with $1.2 billion going into 415 deals, compared to $1.2 billion going into 342 deals in 2006.  Early stage investments experienced a significant increase in 2007 both in terms of deals and dollars, with $5.2 billion going into 995 deals compared to $4.1 billion going into 923 deals in 2006.  The percentage of total deals in seed and early stage investments combined was 37% in 2007, up from 35% in 2006. 

Expansion stage investments decreased slightly in 2007 with $10.8 billion going into 1,235 deals, compared to 2006 when $11.5 billion went into 1,359 deals and accounted for 32% of the total deals in 2007 compared to 37% in 2006. 

First-time financings reached the highest levels since 2001, with 1,267 companies receiving $7.2 billion in venture capital in 2007, marking an increase of 8% in the number of companies entering the venture-financed arena for the first time in 2007 versus 2006.

Industries receiving the most dollars in first-time financings in 2007 were software with 250 deals valued at $1.14 billion, followed by industrial/energy with 141 deals for $1.08 billion and biotechnology with 134 deals for $982 million.

71% of first-time financings in 2007 were in the seed/early stage of development, followed by expansion stage companies at 23% and later stage companies at 7%.

On the global scale, in 2007, US-based venture capitalists invested $1.1 billion in 91 deals in India and $1.4 billion in 133 deals in China, representing all-time highs for US investments in each country.  These figures are reported separately and are not included in the aggregate totals above.

Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers concluded that 2007 was a good year to be an entrepreneur. “With an encouraging M&A market and the most venture-backed IPOs that we've seen in several years, it's no surprise that VCs have stepped up their investments.  Four straight $7 billion plus quarters is a clear indicator that VCs have a positive outlook on their investing opportunities, and that means good things for entrepreneurs looking for funding.  And, with the large number of later stage companies receiving investments, it appears that VCs are banking on the markets to stay active throughout 2008."