Venture Investing Reaches Highest Level Since 2002, According to MoneyTree Report

The second quarter of 2006 proved fertile for U.S. companies seeking venture funding, according to the MoneyTree Report compiled by PricewaterhouseCoopers, the National Venture Capital Association and based on data by Thomson Financial, growing to $6.3 billion in 856 deals, representing a 2 percent increase in dollars and a 5 percent increase in deals from the prior quarter.

The increase was driven by investments in the biotechnology, industrial/energy and networking and equipment sectors, all showing slight gains in the quarter. Other major industry categories that experienced increases in investment amounts in Q2 were electronics and instrumentation/semiconductors, both of which have been climbing steadily over the last year.

Internet Sector Investing Flat

Internet-specific companies received $916 million going into 143 deals in Q2, remaining relatively flat from Q1 and accounting for 14 percent of total investment. The survey defines "internet-specific" companies as those whose business models are fundamentally dependent on the Internet, regardless of the company´s primary industry category such as software or telecommunications.

Telecom Sector Investing Down

The telecom industry category, which suffered a drop in investments in Q1, remained flat. Specifically, investment in wireless continued to decline in terms of dollars, but increased slightly in terms of deals.

Early Stage Investing Flat

Venture capital investment in startup and early stage companies remained flat from the

Q1 in terms of dollars but increased 13 percent in the number of deals to $1 billion going into 268 deals, suggesting that VCs are offering smaller rounds to more companies. Average post-money valuations of early stage companies dipped slightly to $14.06 million for the 12-months ending Q1 2006 (The valuation data lags investment data by one quarter).

Expansion Stage Investing Up

Funding for Expansion stage companies hit the highest investment level in four years reaching $2.9 billion, a 17 percent increase over the prior quarter. The number of deals rose slightly to 329, a 6 percent increase from Q1. The average post-money valuation for expansion stage companies increased to $59.16 million for the 12 months ending Q1 2006 compared to $56.81 million in the Q4 2005 period.

Later Stage Investing Down

Investments in later stage companies declined by 11 percent from Q1 with 259 companies capturing $2.4 billion. However, average post-money valuations continued to increase to $96.41 million for the 12-month period ending Q1 2006 from $94.72 million ending Q4 2005. The report suggests this increase reflects the maturity of the companies still in the pipeline due to a sluggish IPO market.