Sector and Industry Analysis

The Life Sciences Sector (Biotechnology and Medical Devices industries, together) continued to see strong interest from venture capitalists in Q3 with $1.8 billion going into 177 deals. 

• Biotech investing dollars for the quarter fell 5 percent to $1.14 billion from an extremely strong Q2, but took over the highest dollars received by a single industry category from Software for the first time this quarter. 

• Medical device investing increased 12 percent to $639 million.

•  In the third quarter, Life Sciences investing accounted for 29 percent of all venture capital dollars, consistent with historical percentages.

Software experienced a 19% decline in investment dollars and a 24% decline in deals from Q2, with $1.09 billion going into 186 deals. Although Software still accounts for 18% of total dollars and 23% of all deals, the third quarter marked the lowest number of Software deals since 1996. 

The Industrial/Energy sector continued a steady incline, reaching a six-year high with $576 million going into 45 companies. Within the sector, Alternative Energy investing increased to $274 million. 

Telecommunications had its strongest quarter since 2002 with $848 million going into 72 deals. The increase was driven by deals in the Internet Communications and Wireless Communications sub-sectors. 

Internet-Specific companies captured $1.1 billion going into 154 deals in Q3, representing a four-year high and accounting for 17% of total investment. 

Stage of Development and 12-Month Average Valuations

Venture capital investment in Seed and Early Stage companies increased 10% in terms of dollars in the third quarter of this year with $1.2 billion going into 278 deals. The increase was driven by more Seed stage deals and higher Seed and Early Stage dollars, suggesting a greater confidence in the promise of young companies overall. 

Average post-money valuations of Early Stage companies rose to $15.4 million for the 12 months ending Q2 2006. (Note: Valuation data lags investment data by one quarter.)

Funding for Expansion stage companies fell 10% in dollars for the third quarter to $2.9 billion after a strong Q2. The number of deals also fell 14 percent to 300. The average post-money valuation for Expansion Stage companies increased to $66.21 million for the 12 months ending Q2 2006.

Investments in Later Stage companies also declined by 13% in dollars and 20% in deals in Q3, with 219 companies capturing $2.2 billion. However, average post-money valuations continued to increase to $92.99 million for the 12-month period ending Q2 2006.

Overall for Q3, Seed/Early Stage companies accounted for 35% of the deals; Expansion Stage for 38%; and Later Stage for 27%. These percentages showed Seed/Early companies snatching percentage points from the Later-stage companies.

First-Time Financings

The investment dollars received for the first-time in Q3 2006 remained strong with 266 companies receiving $1.5 billion. These levels are relatively flat compared to Q2. Seed/Early Stage deals attracted most of the first time money with 50% of the total dollars and 70% of the total deals.

International Investing

In the third quarter of 2006, US venture capitalists invested $221 million in 18 deals in Chinese companies; $203 million in 18 deals in Indian companies and $46 million in 11 deals in Israeli companies.