Venture Capital Investments Up 19% in Q2 2011

Michelle Remo, “Big 4″ observer
July 24, 2011 /

In a total of 966 deals, venture capital investments have risen to 19 percent in the second quarter of 2011 to $7.5 billion, with the internet-specific investments reaching its 10-year high level and life sciences dollars jumping 37 percent from first quarter 2011.

These were the results of KPMG’s MoneyTree Report, which was released following the firm’s Global M&A Predictor showing that the forward price/earnings (PE) ratios have risen by 12 percent over the last year, indicating an increased appetite for making deals.

According to the MoneyTree Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters, “venture capital (VC) investment activity increased 19 percent in terms of both dollars and the number of deals compared to the first quarter of 2011 when $6.3 billion was invested in 814 deals.”

This represents the highest total in a single quarter since the second quarter of 2008. The deal count for the first half of 2011 totaling 1,780 deals is nearly identical to that seen in the first half of 2010 (1,784 deals) while the $13.8 billion invested in the first half of 2011 represented a 12 percent increase over the $12.3 billion invested in the first half of 2010.

“This quarter’s increased investment levels signals an incredible opportunity for job creation and innovation, but if current dynamics continue, it will not be sustainable. For the past three years, the venture capital industry has been investing significantly more dollars into companies than it has been raising from institutional investors,” said Mark Heesen, president of the NVCA.

According to Heesen, a pick-up in exits, and subsequently fundraising, could start up this level of investment.
“The money simply will not be available to invest. Ironically, our industry should be much less concerned about a bubble and more concerned about being in a position to adequately fund the tremendous opportunities out there in the next decade,” he said.

VC dollars invested in the Life Sciences sector (biotechnology and medical device industries combined) increased during the second quarter, rising 37 percent in dollars and 12 percent in deal volume from the prior quarter to $2.1 billion going into 206 deals. Investments in Internet-specific companies also rose considerably to the highest quarterly level since 2001.

“The rise in venture capital investments going into the Life Sciences and Internet sectors can be attributed to the increase in exit activity in the Life Sciences sector and attractive valuations for Internet companies,” said Tracy Lefteroff, global managing partner of the venture capital practice at PwC US.

“The exit market for both biotech and medical device companies has been active over the past year, and this has encouraged VCs to put more money back to work in this space,” Lefteroff added.

“It also makes sense that we’re seeing an increase in VC investments going to Internet companies, when you take into account the valuations on some IPOs that have priced recently, particularly in the social networking space,” she said.

A strong level of venture capital funding could be expected as long as the markets continue to reward these companies with attractive valuations, according to Lefteroff.

“Overall, the increase in investment levels in Q2 remains encouraging for entrepreneurs. At the current pace of venture capital investing, 2011 is on track to exceed $26 billion, which would put it as the sixth most active year in VC investing history.”

The MoneyTree Report measures cash-for-equity investments by the professional venture capital community in private emerging companies in the US. The report is based on data provided by Thomson Reuters, which includes the investment activity of professional venture capital firms with or without a US office, SBICs, venture arms of corporations, institutions, investment banks and similar entities whose primary activity is financial investing.

Highest funding goes to software industry

The software industry received the highest investment at $1.5 billion during the second quarter of 2011, marking a 35 percent increase in dollars compared to the $1.1 billion invested in the first quarter. Moreover, the software industry had the most deals completed in the second quarter with 254 rounds, 25 percent up from the 203 rounds completed in the first quarter.

“In terms of dollars invested, the biotechnology industry returned to second place, rising 46 percent from the prior quarter to $1.2 billion in the second quarter of 2011. The number of deals also rose in the second quarter, increasing 20 percent to 116 from 97 in the first quarter of 2011,” noted KPMG.

“The Medical Devices and Equipment industry also experienced an increase, rising 26 percent in Q2 to $841 million, while the number of deals remained relatively flat at 90 deals in Q2. This sector ranked third overall in Q2 in terms of dollars invested,” the report added.

Meanwhile, investment in Internet-specific companies increased in the second quarter with $2.3 billion going into 275 companies, representing a 72 percent rise in dollars and 46 percent in deals from the first quarter when $1.4 billion went into 189 deals.

“The second quarter marks the most dollars going into Internet-specific companies in a decade, since the second quarter of 2001. Five of the top 10 deals this quarter, including the top two deals, were classified as Internet-specific investments, which is a discrete classification assigned to a company with a business model that is fundamentally dependent on the Internet, regardless of the company’s primary industry category,” KPMG said.

In terms of dollars still, the Clean Technology sector, which comprises alternative energy, pollution and recycling, power supplies and conservation, fell 23 percent to $942 million in the second quarter from the first quarter when $1.2 billion was invested.

The number of deals completed in the second quarter, however increased 11 percent to 81 deals compared with 73 deals in the first quarter, marking the most active quarter for Clean Technology deals completed in MoneyTree history.

Ten of the 17 MoneyTree sectors experienced double-digit increases in dollars in the second quarter, including IT Services (19 percent increase), Media & Entertainment (27 percent), Consumer Products & Services (248 percent), and Semiconductors (22 percent increase).

Stage of Development

Seed and Early stage investments rose 24 percent over the prior quarter in both dollars and deals with $2.4 billion going into 464 deals in the second quarter, accounting for 48 percent of total deal volume in Q2, compared to the first quarter when it accounted for 46 percent of all deals.

The average Seed deal in the second quarter was $3.2 million, up from $1.8 million in the first quarter. The average Early stage deal was $5.8 million in Q2, down slightly from $6.0 million in the prior quarter.

Additionally, expansion stage dollars increased 9 percent in the second quarter, with $2.3 billion going into 260 deals. Overall, expansion stage deals accounted for 27 percent of venture deals in the second quarter, down slightly from 28 percent in the first quarter of 2011. The average Expansion stage deal was $9.0 million, down from $9.3 million in the prior quarter.

“Investments in Later stage deals increased 24 percent in dollars and 16 percent in deals to $2.8 billion going into 242 rounds. Later stage deals accounted for 25 percent of total deal volume in Q2, compared to 26 percent in Q1 when $2.2 billion went into 209 deals. The average Later stage deal in the first quarter was $11.5 million, which increased from $10.8 million in the prior quarter and represents the largest average deal size for Later stage companies since the first quarter of 2004,” noted KPMG.

First-Time Financings

Companies receiving venture capital for the first time increased 30 percent and the number of deals inched up 22 percent with $1.5 billion going into 310 deals.

First-time financings accounted for 20 percent of all dollars and 32 percent of all deals in the second quarter, compared to 18 percent of all dollars and 31 percent of all deals in the first quarter of 2011.

Companies in the Software, Biotechnology, and Media & Entertainment industries received the highest level of first-time dollars.

The average first-time deal in the second quarter was $4.8 million, up from $4.5 million in the previous quarter. Seed/Early stage companies received the bulk of first-time investments, garnering 61 percent of the dollars and 77 percent of the deals, an increase from 56 percent of dollars and 75 percent of deals seen in Q1 2011.

 

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