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Global Web 2.0 deals up 14 per cent in first half as venture capitalists tap new markets

Web 2.0 has gone global.

Web 2.0 has gone global. What was once an industry focused almost entirely on the San Francisco Bay area has expanded into new markets within the US as well as in Europe and Israel, according to new data released by Dow Jones VentureOne and Ernst & Young.

The research indicates that investors directed at least USD464.2 m into 101 deals worldwide in the first half of this year, the highest half-year total on record for the sector, and an increase of more than 7 per cent from investments in the same period of 2006.

Overall, the number of global Web 2.0 deals climbed 14 per cent in the first half. However, this was entirely attributable to a rising interest in Web 2.0 in Europe and Israel, as US investments were virtually unchanged from the first half of 2006 with 67 deals and USD357m invested.

‘Certainly, the blockbuster growth of Web 2.0 technologies has impacted every sector in the US, from media to retail to hospitality and consumer products,’ says Jessica Canning, director of global research for VentureOne.

‘But we may be seeing a plateau in the number of Web 2.0 companies investors are willing to back in the US – at least until a clear liquidity market arises. In the meantime, more investors are turning to Web 2.0 plays in emerging markets in Europe.’

The data showed that USD52m was put to work in 20 European Web 2.0 deals in the first half, roughly double the deals and investments seen in the same period last year. What’s more, Israeli Web 2.0 companies had their best showing to date, raising USD15m in five deals in the first half, up from two deals and USD5m invested in all of 2006.

Within Europe, the UK posted the most activity in the first half with a record seven deals accounting for USD22m invested. France is also on pace to have a banner year, with five deals raising USD16m. Belgium, Ireland and the Netherlands all saw their first Web 2.0 deal completed in the first six months of 2007.

‘From 2002 to 2006, 40 per cent of all Web 2.0 deals were located in the Bay Area,’ Canning says. ‘But in the first six months of this year, that figure dropped to just 20 per cent and seems to be related to the presence of fresh investor blood in the space.

‘It seems that many long-time stalwart Web 2.0 investors have filled their portfolios with Bay Area companies and are stepping aside, giving new investors opportunity to scour for promising deals in less-saturated regions.’

The US region that saw the biggest pick-up at the expense of the Bay Area, according to the data, was New England, which saw USD102m invested in 10 Web 2.0 deals. That is 65 per cent more than the total invested in 12 New England Web 2.0 deals throughout 2006 – and slightly more than the amount invested in Bay Area companies.

Another region to see a surge in investor interest was southern California, where VCs put USD59m to work in eight Web 2.0 deals in this region, well on track to exceed 2006’s full-year total of USD64 million invested in 13 deals.

Several of last year’s biggest Web 2.0 investors participated in far fewer deals. For example, Benchmark Capital was the sector’s top global investor in 2006, having participated in 16 Web 2.0 deals, many based near its home in Menlo Park, California.

But in the first half of 2007, Benchmark backed just three deals and only one in the Bay area. It was a similar story for Omidyar Network, Kleiner Perkins Caufield & Byers and Storm Ventures.

Most US deals completed in the first half of 2007 focused on the so-called ‘Enterprise 2.0’ area – companies that use Web 2.0 technologies such as online collaboration to improve traditional business functions – while deals in China, Europe and Israel had a distinct consumer bent. Among the largest Web 2.0 deals of the first half was the USD30m first round for enterprise software provider n2N Commerce.

But despite experiencing a flat first half, the US still dominates the Web 2.0 market, accounting for 66 per cent of all deals worldwide and 77 per cent of venture financing. The Bay area, too, remained the busiest region in the US with 25 deals accounting for USD91m. But New England, the New York metropolitan area and southern California are on pace to set annual records for Web 2.0 deals and investments.

China posted just nine deals, accounting for USD41m in investment, down from the USD43m invested in 12 deals during the same period last year. The median size of a Web 2.0 deal on a global basis was USD4.6m in the first six months. For US deals, the median round size reached USD5.2m in the first half, the highest figure on record. The most active investors in Web 2.0 on a worldwide basis so far in 2007 are Sequoia Capital and Draper Fisher Jurvetson.

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