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Global venture capital investment set to top USD40bn amid favorable exit environment

With more than USD30bn invested through the first three quarters of the year, venture capital activity in the US, Europe, China and Israel in 2007 is on pace to post its highest annual inv

With more than USD30bn invested through the first three quarters of the year, venture capital activity in the US, Europe, China and Israel in 2007 is on pace to post its highest annual investment total since 2001, according to a global year-end analysis by Dow Jones VentureOne and Ernst & Young. This year, investment is expected to top USD40bn at the close of the fourth quarter while deal flow is likely to come in slightly above the 3,884 deals completed in 2003.

The analysis found that, along with strong investment growth overall, the global venture capital market has shown considerable interest in cleantech and medical devices. In fact, worldwide investment in medical device companies has surpassed USD3.40bn so far this year, already an annual record. And through the half of the year, global cleantech investment had reached USD1.1bn, up 44 per cent from the USD764.3m invested in the same period last year.

‘The new global surge in venture capital investments particularly in cleantech and healthcare companies, has been driven by a number of factors,’ says Gil Forer, Global Director of Ernst & Young’s Venture Capital Advisory Group.

He says, ‘First, there is heightened demand for innovative technologies in energy efficiency and medical technology around the globe in both mature and emerging markets. The healthy exit environment, both for IPO’s and for mergers and acquisitions, is spurring investment in a number of areas. In addition, today’s venture-backed companies need to establish competitive, global operations quickly and thus require more financing capital. Finally, innovation is the new currency of competition and venture capitalists are responding to the demand for external innovation from an increasing number of large corporations that have concluded they must look for innovation beyond their in-house research and development functions to win in their markets.’

This analysis was echoed by Jessica Canning, Director of Global Research at Dow Jones VentureOne: ‘This year has continued the upward trend we saw beginning at the end of 2005 when the venture capital investment cycle began to ramp back up. This is particularly evident in emerging areas of investment, where venture-backed companies are aiming to improve the health of the planet and its people. In addition, the booming interest in consumer technology and services in emerging markets like India and other Asian markets is helping to drive the growth of the global venture capital industry, as evidenced by the development of new venture capital hotbeds in Beijing and Bangalore.’

Among the key venture capital metrics, 2007 has seen robust IPO activity with 96 initial public offerings raising more than USD7.70bn worldwide, the largest sum raised at initial public offering since 2000. The US accounted for the bulk of the activity with 48 IPO’s completed in the first three quarters of the year, raising USD4.68bn.

The analysis also showed that China saw a record amount of liquidity generated in the first three quarters with USD1.87bn raised in 14 IPO’s. And, after two years of strong IPO activity, the European market cooled slightly, with just 27 companies going public so far this year. Even so, these companies raised USD1.04bn.

What’s more, the median amount being paid for venture-backed companies remains very high, especially in the US, where the median reached USD89.0m after three quarters, and Europe, where the median stands at a record USD29.6m.

‘In India, venture capital investment by both US and local venture capital funds accelerated in the first three quarters of 2007. We’ve seen more than USD777.2m invested in at least 57 deals in India this year,’ says Forer. Among some of the larger deals in India was the more than USD30m invested by Fidelity International, ICICI Venture Funds Management Company, Limagrain Groupe and others in Bangalore-based biopharmaceutical company Avestha Gengraine Technologies.

In other regions, overall venture investment in Mainland China produced 168 deals and reached USD1.75bn in the first three quarter of this year. The report showed that USD709.8m-nearly 41 per cent of all capital invested in this timeframe-went to 55 deals in the Business/Consumer/Retail industry, exceeding the annual record of USD675.7m set in 2006. One of the largest deals was the USD25m later-stage round for Beijing-based RedBaby, an online specialty retailer in the Business/Consumer/Retail category.

The major story of the year may be the growing deal sizes seen around the world. The median deal size surpassed a record USD6.0m for the first time in Israel and China. In Europe, the median stands at a record USD3.95m. The US venture industry saw its deal median reach USD7.55m, its highest level since the USD8.0m record set in 2000.

‘The rise in venture capital deal sizes is in correlation to the healthy exit environment we’re seeing, as investors are equipping portfolio companies with the capital required to quickly ramp up operations and balance their budgets in preparation for a public offering or to attract possible corporate acquirers. This is most clearly seen in the US health care industry, which has seen its median deal size reach USD10m in the first three quarters of 2007,’ says Canning.

The US health care industry saw 36 venture-backed companies sold for USD6.02bn in the first three quarters of 2007. This pushed the median amount paid for a venture-backed health care company to USD130m, by far the highest total on record.

‘We have seen median deal sizes at their highest levels in at least seven years, demonstrating that investors are placing bigger bets on selectively fewer companies to sustain the most promising emerging market leaders as they compete worldwide to become the next global market leaders,’ says Forer.

Among the positive signs in the venture capital market in 2007 was the continued interest in cleantech. For the purposes of the VentureOne and Ernst & Young analysis, cleantech was defined as encompassing innovative products and services that optimize the use of natural resources or reduce the negative environmental impact of their use while creating value by lowering costs, improving efficiency, or providing superior performance.

The US market is clearly driving the global cleantech market, with USD892.6m invested in 71 companies in this area during the first six months of this year, 70 per cent more than was invested over the same period in 2006. Even so, investors aren’t overfunding these companies, as the median investment so far this year in the US is USD7.55m, which is on par with the overall US deal median. Elsewhere, investment in cleantech has remained steady with USD86m invested in 19 deals in Europe and USD121.1m invested in four deals in China.

Another bright spot for the worldwide venture capital industry was the rising interest in medical devices, as the sector set an annual record for investment in the US already and is on pace to do the same in Europe. In the US, venture capitalists invested USD2.82bn in 189 deals during the first three quarters, which is 5 per cent more than the previous annual record of USD2.69bn set last year. In Europe, the USD429m invested in 46 deals has the sector on pace to finish the year ahead of the current USD493.7m annual record set in 2005.

Looking forward to 2008, although the favorable liquidity landscape could be impacted by an economic downturn in the US both the global IPO pipeline-especially in emerging markets-and the global market for mergers and acquisitions are likely to remain robust and drive venture capital investment and innovation. In addition, it is expected that large multinational corporations will increase their investment activity and partnerships with venture-backed companies. The year will also likely see continued growth in the new venture capital markets in Asia, along with additional investment focused on health care and cleantech innovations in energy and water.

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