Chasing the Next YouTube Venture money flowing towards consumer Internet startups. November 7, 2006 Venture investors are piling into the hot consumer Internet space this year at rates unseen since the height of the tech bubble, a new report has found. In the first three quarters of 2006, $455 million was raised for Web 2.0 companies—more than twice the amount that had been raised in the first three quarters of 2005, according to Dow Jones VentureOne and Ernst & Young, which released the figures Tuesday. Some of the hottest consumer internet sectors are, not surprisingly, video sharing and social networking. Internet gaming and entertainment are also on the rise, according to notes for a Dow Jones Consumer Technology Ventures conference held this week at the Fairmont Hotel in San Jose. The explosion of profitable exits such as YouTube’s $1.65 billion acquisition by Google are just one reason that the investment climate is ripe for Web 2.0 companies, said Brian Jacobs, general partner at Emergence Capital Partners, a San Mateo, California venture firm that focuses on consumer internet and software companies. Another reason, quite simply is that there is more money going towards venture capital firms than there was in the recent past, he said. Investors from around the world are eyeing U.S. Internet companies as the place to invest, and this is one reason that funding is on the rise. (See: Survey Reveals Global VC Trends) More than $1.63 billion has been invested so far this year into 198 companies in the overall technology sector, according to the report. This is nearly as much as was spent in all of 2005. Consumer internet accounted for 28 percent of all the investment in technology companies this year, making it a key driver of the growth. Is it a bubble? Perhaps, said Mr. Jacobs, but there are also plenty of signs that Web 2.0 companies are run by quality entrepreneurs with solid business models, he said. “VCs are definitely interested in the sector, but they’re not overfunding the companies, at least not yet,” he said. This is a very different time than the previous bubble because Web 2.0 companies are more capital efficient than their Web 1.0 predecessors, he said. They need less start-up capital and aren’t getting round after round of funding in quick succession as in the late 1990s. The report did indicate that despite an overall rise in investment, the number of early stage fundings remained stable, while second stage fundings are more volatile. The past year saw a large uptick was in second round fundings by venture firms: the number of deals more than doubled and the amount invested nearly tripled, from $63 million in all of 2005 to $214 million so far in 2006. What this shows, said Mr. Jacobs, is that there is a wave of investment that began in around 2004. It may also show that many Web 2.0 companies are making it over the first hurdles and proving themselves worthy of further investment.