US Venture Capital Investing Reached $25.75 Billion in 2006, a 5-Year High

Venture capital investment into U.S. headquartered companies increased 8% to $25.75 billion in 2,454 deals in 2006, the most annual deal flow and capital investment since 2001, according to the Quarterly Venture Capital Report released by Ernst & Young LLP and Dow Jones VentureOne. 

While 2006 VC activity is at a five-year high, the fourth quarter of 2006 was the slowest quarter of the year with 561 deals (down 13% YoY) and $5.82 billion invested (down 2% YoY).

Last year, most VC money went into key growing industries such as the Web-based information services industry, the medical devices and equipment industry and the alternative energy industry. 

Overall, the median round size in 2006 was $7 million, up from $6.5 million in 2005, and the highest annual median since 2000. 

For the second year in a row, investors also are focusing more than a third of activity on early-stage financings. Overall, seed- and first-round deals made up 36% of the deal flow in 2006; about the same concentration of deal flow went to later-stage deals.

VC Investments By Industry:

Deal flow and capital investment into health care companies showed the most significant increases in 2006. 

Health care deal flow was up 5% over 2005 to 628 deals and capital investment for the industry was up 12% to $8.25 billion. 

One of the largest deals of the fourth quarter, and among the largest deals of the year, was the $100 million later round for biopharmaceutical company Kalypsys of San Diego, Calif., a developer of small molecule drugs. 

Within the health care industry, the medical devices and equipment segment was particularly strong with 239 deals and $2.63 billion invested, which is 20 more deals than in 2005 and the most capital invested in this segment on record. 

The median size of a health care deal was $8 million in 2006, about the same as last year.

Deal flow and investment in alternative energy companies more than doubled to 41 deals this year and the capital investment increased 190% to $537.6 million.

The information technology industry posted gains in key segments, although overall deal count was down by 21 deals from the previous year. But capital invested in IT overall increased 2% to $13.76 billion, the most money deployed in technology companies since 2001. 

The increase was significantly boosted by investment in the information services segment, which saw the most activity since 2000, and is home to much of the Web 2.0 companies that have been attracting investors attention. Overall information services deal flow rose 35% to 321 financing rounds in 2006. Capital directed here was $2.41 billion, an increase of 27% from 2005.

The largest deal of 2006 was a technology deal, the $150 million second round for communications company Amp'd Mobile of Los Angeles, Calif., a mobile entertainment services provider.

Investment in business, consumer and retail products and services companies also increased over last year, with a total of 274 deals and $2.63 billion in capital. This included one of the largest deals of the fourth quarter, a $100 million later-stage investment to HomeAway of Austin, Texas, an online vacation rental listing service.

VC Investments by Region in US: 

California has become the top spot for venture capital investment in 2006: with 1,082 deals and $12.36 billion invested, it is responsible for almost half the deal flow and investment nationwide. 

The San Francisco Bay area remained the predominant market for venture capital investing, with 811 deals and $9.05 billion invested, steady deal flow with 2005 and a 7% increase in capital.

New England received the second most number of deals, behind only the San Francisco Bay Area, but its annual deal flow and investment was down 3% and 2%, respectively in 2006. 

The New York metropolitan region saw an increase in deal flow to 182 deals, but capital was down 5% to $2.09 billion. 

``I think 2006 proved that the U.S. venture capital industry has entered a new cycle with many investors renewing their commitment to the entrepreneurial spirit by focusing attention and capital on companies that affect our health, the way we communicate, and the environment,'' said Stephen Harmston, Director of Global Research for VentureOne. ``The data also shows that investors are recognizing the economic reality for start-ups today and are willing to sustain them with round sizes that are at the highest levels in six years.''

Source: Dow Jones VentureOne (http://www.ventureone.com)

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