19 Oct Q3 venture investing up despite lower number of deals
New York, N.Y. – The third quarter of 2007 saw a nearly 8 percent year-over-year increase in the amount of equity financing, yet showed a 6 percent decline in the number of venture deals, according to a quarterly investment report released by Ernst & Young and Dow Jones VentureOne.
While there are rumblings of an economic slowdown fueled in part by the sub-prime mortgage crisis, the amount of equity dollars deployed in the third quarter is indicative of a still healthy investment climate.
The number of financing rounds (deals) declined from 727 to 635 between the second and third quarters, but the total invested grew from $7.473 billion to $8.071 billion, marking the first time the overall quarterly deal median reached $7.5 million.
“The investment climate is excellent,” said Randy Tavierne, strategic growth markets leader for Ernst & Young. “It’s the biggest quarter we’ve had since 2001. The investment dollars venture capitalists are putting in demonstrates there still are exciting investment opportunities.”
Tavierne is not concerned about the lower number of rounds. He said the increasing amounts of venture dollars is going to later-stage companies as investors see them develop. As the nation’s smaller entrepreneurial companies continue to drive a wealth of job creation, he said they eventually will see a greater share of available dollars.
Since the dotcom bust, when venture dollars were committed to companies with what Tavierne called “unworthy” business plans, he said venture investors have been more cautious in evaluating ideas and business plans, and more savvy about where they invest.
National breakdown
As usual, investment in information services led the way with $3.77 billion in 367 deals, although that was down from the $4 billion committed in 435 deals in Q2. Following information services in Q3 were healthcare, $2.47 billion in 138 deals, and business/consumer/retail, $902 million in 77 deals.
The latter category experienced the largest quarterly surge, having reported $559.8 million in deployed capital during the previous quarter.
In addition, record deals and investment were reported in the “other” category, which includes clean tech and alternative energy. A total of 53 deals totaling $927 million were reported, up from 47 deals for $487.4 million in Q2 – nearly double the total invested in the second quarter.
Wisconsin reported two significant venture deals in the third quarter, including a $21 million round for Virent Energy Systems, which is developing renewable fuels from sugar and other biomass, and a $23.6 million round for OpGen.
Citing government incentives, high oil prices, and instability in the Middle East, Tavierne predicted that investors would continue to show strong interest in alternative energy and clean tech.
He also said the healthcare sector, especially medical devices, would continue to attract venture dollars because of the needs of 75 million aging Baby Boomers. He said the “graying of America” is reflected in the first Baby Boomers receiving their Social Security checks, and meeting their needs will create investment opportunities in medical devices and healthcare information technology.
The smaller picture
Through the first three quarters of 2007, more than $22.7 billion of venture capital was deployed 1,976 deals, moving total venture deployment to a pace that would exceed the $27.18 billion reported for all of 2006. That year, 2,577 deals were reported overall.
The financings include cash investments by professional venture capital firms, corporations, other private-equity firms, and individuals.
One Wisconsin investor believes the total invested might actually be undercounted. Ken Johnson of Kegonsa Partners said the investment activity of smaller funds like his, which comprise the majority of investment funds in Wisconsin, often isn’t reflected in the numbers put out by Ernst & Young-Dow Jones or the report published by National Venture Capital Association and Price Waterhouse Coopers.
Johnson, who said his firm has made seven investments this year and usually makes investments in the $500,000 range, said those who run small funds typically don’t fill out the surveys because they don’t have the time or the staff resources, or because they can’t afford to pay for membership in organizations like the NVCA. “In Wisconsin, we have a much higher percentage of small funds than is typical,” Johnson said. “We’re new and you’ve got to have minnows before you can have whales.”
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• OpGen’s $23.6M venture capital score could transform hospital care
• $21 million round reaffirms investor interest in Virent Energy Systems