Venture capitalists significantly boosted their deal activity last year, investing $25.5 billion in startups. It was the largest level of deal making since 2001, thanks in large part to VCs’ appetite for life sciences, media/entertainment, energy and the Internet.
VC firms invested $25.5 billion in 3,416 U.S. deals in 2006, an increase of 12% over the $22.8 billion invested in 2005, according to the MoneyTree Survey by PricewaterhouseCoopers, Thomson Financial (publisher of PE Week) and the National Venture Capital Association. Venture investments for the year were at the highest level since 2001.
Life sciences led the pack, drawing more than one-fourth of the dollars, more than any other investment sector last year. Venture-backed life sciences companies raised $7.2 billion in 731 deals, up from $6 billion in 647 deals in 2005.
Media and entertainment companies also accounted for a sizeable chunk of the funding increase. VCs put $1.6 billion into 299 deals in the sector last year, compared to $1 billion in 180 deals in 2005. Internet-specific companies, which operate in several industries but share a business model dependent upon the Internet, also saw gains in funding, securing $4 billion in 645 deals, up about 20% from the year before.
Some of the largest media and entertainment funding rounds were for companies in the video space. These included MovieBeam, a Burbank-based provider of video-on-demand products and services, which raised $52.5 million last year from such backers as Cisco Systems, The Walt Disney Co., Intel Capital, Mayfield Fund, Norwest Venture Partners and VantagePoint Venture Partners.
Ripe Digital Entertainment, another video-on-demand company, raised $32 million in September from such firms as Columbia Capital, Rho Ventures and Time Warner Investments. Meanwhile, Active Network, a sports an recreation information website, also raised $35 million in later stage funding from more than a half-dozen venture funds.
VC enthusiasm for alternative energy companies also contributed to a doubling in funding for the industrial and energy sectors. Firms invested $1.8 billion in 183 companies in the sector, with alternative energy accounting for 40% of that.
But not all industries saw a rise in funding. VC activity in software was relatively flat last year, with $5 billion going into 865 deals, compared to $4.8 billion in 869 deals in 2005. Telecom companies, meanwhile, accounted for 294 deals and $2.6 billion in VC funding, also relatively flat in comparison to 2005.
In addition to investing in more U.S.-based companies, U.S.-based venture firms were also active overseas, investing $856 million in 71 deals in India and $1.1 billion in 105 deals in China.
Within the United States, venture investors did more deals outside Silicon Valley, with startups in the New York, Los Angeles and San Diego regions attracting a larger share of funding. Silicon Valley companies drew more than one-third of the funding last year, lower than the average level of 45% or more, says Susan O’Dwyer, national director of venture capital research at PricewaterhouseCoopers.