Venture capital dealmaking hits 5-year high with $25.5B

Published: Tuesday, January 23, 2007 at 6:01 a.m.
Last Modified: Tuesday, January 23, 2007 at 12:18 a.m.
SAN FRANCISCO - Venture capitalists invested $25.5 billion in 2006, marking the industry's biggest burst of dealmaking since the dot-com bust clogged the financial spigot for entrepreneurs five years ago.
A renewed interest in Internet startups, combined with expanding opportunities in the health care and alternative energy markets, spurred a 12 percent increase from the $22.8 billion invested in 2005, according to figures jointly released Tuesday by PricewaterhouseCoopers, Thomson Financial and the National Venture Capital Association.
Last year's activity, spread across 3,416 deals, generated the highest level of investment since venture capitalists forked out $40.7 billion in 2001, the end of a manic era driven by a pursuit of dot-com riches.
After hundreds of their Internet bets flopped, venture capitalists recoiled in despair through 2002 and 2003.
Last year, venture capitalists poured $4 billion in Internet startups, a 25 percent increase from $3.2 billion in 2005. It was the industry's largest commitment to the Internet since 2001 when the high-tech financiers pumped $10.2 billion into the sector.
Venture capitalists also upped the ante substantially in biotechnology, which received $4.5 billion last year, up by 17 percent from 2005.
The most robust growth occurred in the industrial and energy category, where venture capital investments more than doubled to $1.8 billion. About 40 percent of that money was earmarked for alternative energy projects.
Now that venture capital's investment volume has increased in each of the last three years, the chances of creating another bubble are rising, too, particularly since the industry has raised a total of $56 billion in the past two years.
So far, though, venture capitalists have been proceeding at a moderate pace of growth that suggests they may have learned from their past mistakes.
''It's not crazy out there right now. We are just in this kind of steady state,'' said Rob Chaplinsky, founding partner of Bridgescale, a venture capital firm in Menlo Park.
Over the past three years, the industry has invested an average of $5.9 billion per quarter, compared with a $16.7 billion quarterly average from 1999 through 2001. ''We are pleased that, to date, quarterly investment levels have remained prudent and no major over-funding has occurred,'' said Mark Heesen, president of the National Venture Capital Association.
Venture capitalists have had a strong incentive to be more careful with their money this time around because it's taking longer for them to cash out of their investments.
Some red flags are being raised in trendy areas like ''Web 2.0'' - a phrase for the Internet craze devoted to social networking and the sharing of content largely given by a Web site's audience. With dozens of sites vying to strike it rich like YouTube Inc. did in its recent $1.76 billion sale to Google Inc., online video looks particularly ripe for a shakeout. Even if the Web 2.0 craze crashes, the financial damage should be minimal because none of the big names in the sector have gone public yet, said Josh Grove, a senior research analyst for Dow Jones VentureOne, a venture capital research firm.

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