Healthcare, IT sectors lead charge, along with renewables.

July 24, 2006

Fueled by high levels of information technology and healthcare commitments, U.S. venture capital investing hit the highest point in more than four years, dedicating $6.73 billion to 619 deals.

The Quarterly Venture Capital Report, released Monday by Ernst & Young LLP and Dow Jones VentureOne, indicates the overall deal count for the second quarter of 2006 rose 3 percent from the year-ago quarter and capital rose 5 percent over the same period. It’s the most venture capital invested in a single quarter since the first quarter of 2001, which was about a year into the decline in investing brought on by the collapse of the Internet bubble.

Breakout firms in life sciences combined with a “moderately healthy” IPO market for healthcare companies were responsible for drawing investor interest, said Stephen Harmston, director of global research for VentureOne.

“Thus it’s no surprise that healthcare investing, and in particular record-breaking investment in biopharmaceuticals, is surging ahead,” he said. “Confidence in the market is also apparent in the level of current venture capital fund-raising—in which some particularly large funds are readying for deployment.”

‘Confidence in the market is also apparent in the level of current venture capital fund-raising—in which some particularly large funds are readying for deployment.’

-Stephen Harmston,

VentureOne

Healthcare Leads Charge

Healthcare investments made the most significant contributions to the quarter’s gains as venture capitalists placed $2.2 billion into the sector over 160 deals. Capital invested was up 25 percent from the year-ago quarter, while the number of deals was up 10 percent.

Average size of deals dropped 2 percent during the period, reflecting investors’ renewed willingness to make earlier-stage bets. Of the largest 12 deals made during the quarter, eight were biotechnology, drug development, or pharmaceutical firms. And of those, five were first- or second-round investments. During the quarter, Berkeley, California-based Aerovance, a developer of biologic products for respiratory diseases, managed to snare the largest second round—$60 million—in the country.

On its heels came Seattle-based VLST, which works to find treatments related to autoimmune and inflammatory diseases, a company that snared the sixth-largest deal in the United States by picking up $55 million in its second round of financing.

Stage-Agnostic

Outside of healthcare, venture capitalists showed a renewed willingness to make earlier-stage bets. Seed rounds increased 125 percent to total $58 million for the quarter, while first rounds popped up 20 percent to $1.2 billion. Second rounds were also popular, bumping up 92 percent to $1.5 billion, while later-stage investing increased only 19 percent to $3.2 billion.

While earlier-stage investing is bouncing back, investor interest in later-stage investing is in no danger of falling off, said Joseph Muscat, Americas director of the Ernst & Young Venture Capital Advisory Group.

“The $3.22 billion directed toward later rounds, the most capital devoted to this round class since 2001, indicates that investors are not troubled by significant capital deployment into existing portfolio companies with strong prospects, mainly in the traditional healthcare and IT segments,” he said in a statement. “At the same time, we see investors pursing early-stage opportunities in areas of new innovation, most notably alternative energy.”

GreenTech

While renewables are relatively new ground for the venture community, that didn’t stop alternative energy from hitting the top-deal spotlight. Companies such as Palo Alto, California-based Nanosolar picked up a $75-million later-stage deal, and Los Angeles-based ethanol producer Altra managed to snare a $50-million first-round infusion.

IT Healthy

It certainly was also a good quarter for IT investing, the most investment in the sector since 2004. Investors shoveled $3.51 billion into the sector, spread over 363 deals. In dollar terms, that`s up 2 percent since the year-ago quarter, with the number of deals holding steady. What`s more, the average IT deal size hit $7.8 million, a level unseen since the second quarter of 2001.

Notable deals in the IT sector came in the form of a $130-million later-stage investment in Rochester, New York-based Current Communications, which provides broadband over powerline services to electric distribution companies. Another notable stake was taken by investors in the $75-million restart of NeoPhotonics, a San Jose, California-based advanced fiber-optic equipment maker.

Within the category, information services investments posted the healthiest increases: up 76 percent for a deal flow count of 79 deals, with capital rising 128 percent to $637 million, the highest in four years. The electronics and computers segment also got a shot in the arm, with capital up 54 percent to $411.7 million invested, and the number of deals up slightly. The soft spot in IT was communications and networking, with capital falling off 40 percent to $638 million, the lowest since the fourth quarter of 2005.