Venture Investment into U.S. Companies Levels Off in Second Quarter of 2011

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Dow Jones VentureSource: Software Investments in IT and Healthcare Gain Momentum;
VCs Share the Cost of Growing Energy Companies

Investors put $8 billion into 776 deals for U.S.-based venture companies during the second quarter of 2011, a 5% decrease in investment and 2% decrease in deals from the same period last year, according to Dow Jones VentureSource. The median amount raised for a round of financing during the second quarter was $5.2 million, up from the $4.6 million median a year earlier.

“Venture investors and entrepreneurs are adjusting to a new reality with more liquidity opportunities and stronger support from corporate investors,” said Jessica Canning, global research director for Dow Jones VentureSource. “As a result, venture investment has held steady as companies either plot an exit or utilize creative financing strategies like government grants, corporate leasing, or project financing to fuel growth.”

Corporations have invested more than $1 billion into venture-backed companies in the past nine months.

Software a Bright Spot in Healthcare and IT

Deals for Healthcare companies slowed 12% and capital invested dropped 17% as 184 deals raised $2.3 billion in the most recent quarter. Despite a 25% drop in deal activity and 7% drop in capital invested, the Biopharmaceuticals sector raised the most capital of any Healthcare sector as 69 deals collected $1.1 billion. The Medical Devices sector was essentially flat as 84 deals raised $925 million. Medical IT, which includes software and services for handling medical records and data, was a bright spot in the Healthcare industry as 19 deals collected $198 million, a 58% jump in deal activity and 27% increase in capital invested.

Information Technology (IT) companies raised $2.3 billion for 255 deals, a 5% increase in deals and 9% increase in capital invested over the second quarter of last year. The Software sector, which saw a deep decline in 2009, has regained its momentum thanks to renewed interest in business applications and communications software. Software companies raised $1.2 billion for 184 deals in the most recent quarter, a 10% increase in deal activity and 26% jump in capital invested. Deal activity in all other sectors of IT – Communications and Networking, Electronics and Hardware, and Semiconductors – was down.

Slight Dip in Deal Flow for Enterprise Start-Ups

Business and Financial Services companies raised $1 billion for 125 deals during the second quarter, a 15% increase in capital invested but a 3% drop in deals from the same period a year earlier. The Business Support Services sector, which is driven by interest in advertising, marketing and data management services, continued to take the lion’s share of investment as 99 deals collected $770 million. Deals in the Financial Institutions and Services sector, which includes start-ups focused on payment processing and lending, fell as 19 deals raised $254 million, a 21% decrease in deal activity but a 36% increase in capital invested.

Consumer Start-Ups Raising Larger Rounds

Consumer Services companies collected $1.3 billion for 138 deals in the most recent quarter, a 51% jump in capital raised and a 7% increase in deals over the same period last year. The Consumer Information Services sector, which includes the much-hyped social media, entertainment and other consumer Web companies, collected 25% more capital than the year-ago period despite a slight drop in deal activity as 97 deals raised $866 million.

“The median round size for consumer deals is creeping up, which means it’s no longer just a few abnormally large funding rounds driving up investment levels,” said Scott Austin, editor of Dow Jones VentureWire. “The wealth is being spread to companies across the industry.”

In 2009 and 2010, the quarterly median round sizes for Consumer Services companies ranged from $2.5 to $3.5 million. In the most recent quarter, the median round size spiked to $4.7 million.

Energy Deals Steady but Capital Raised From VCs Plummets

The Energy and Utilities industry raised $566 million for 29 deals, less than half the capital raised for the 30 deals completed in the second quarter of 2010. As usual, the Renewable Energy sector accounted for most of the industry’s investment as these companies raised $540 million for 27 deals.

“Venture capitalists have a steady appetite for energy start-ups but are looking to share the cost of growing these companies,” said Ms. Canning. “As fewer venture dollars are committed, we see energy companies raising funding from corporations, the government and other types of investors.”

Early-Stage Rounds Account for 37% of Deals

Seed- and first-rounds accounted for 37% of deals and 19% of capital invested during the second quarter, a slight change from last year when early-stage rounds claimed 35% of deal activity and 16% of capital raised. Later-stage deals accounted for 39% of the quarter’s deals and 58% of total capital raised in the second quarter, down from the same period last year when later-stage deals accounted for 41% of deals and 62% of capital raised.