US venture capital investment climbed 8 per cent to USD29.9bn in 2007, says Dow Jones

The year finished strongly, with the fourth quarter seeing 650 deals completed and USD7.3bn invested, a 6 per cent increase in the deal count and 15 per cent growth in investment over the fourth quarter of 2006.

Over the year as a whole, venture capitalists put record amounts of capital to work with biopharmaceutical, medical device and energy-related companies, while also ramping up investment in web-related technologies.

‘It’s clear that US venture capitalists are eager to back innovative technologies that will better our lives through improved health, lower energy costs and a cleaner environment,’ says Jessica Canning, director of global research for Dow Jones VentureSource.

‘Undoubtedly driven by the favourable IPO and M&A markets, investors are also willing to support entrepreneurial companies longer with round sizes that are at the highest levels since the heady dot-com days.’

Overall, the median round size was USD7.6m, up from USD7m in 2006 and the highest annual median since 2000, the report finds. For the third year in a row, seed- and first-round deals accounted for the largest slice of deal activity with 975 deals, or 38 per cent of the total deal count. Later-stage financings, however, attracted by far the most capital with some USD14.3bn (roughly 50 per cent of all capital invested) put into 900 rounds in 2007.

‘While venture investors continued to back emerging start-ups in 2007, they were clearly focusing their sights on navigating later-stage portfolio companies toward liquidity,’ Canning says.

‘The improved prospects for taking venture-backed companies public or complete a merger or acquisition are having an impact. In 2007, the median amount invested in later-stage rounds reached USD11.8m, the highest in more than six years.’

Investment in energy, environmental and advanced specialty chemicals and materials companies – mostly fitting under the ‘clean technology’ banner – saw the most significant growth in deal flow and investment last year.

The report found that the deal count for clean technology companies reached 187, up from 124 in 2006, and investment grew 67 per cent to USD2.5bn, while the median round size remained unchanged at USD7m. One of the largest deals of the fourth quarter belonged to Palo Alto, California-based energy conservation company Project Better Place, which raised a USD200m first round.

Also seeing significant growth as a whole was the health care industry, which recorded a new annual investment record with nearly USD10bn put into 671 deals, according to the report, a 17 per cent increase over the USD8.5bn invested in 662 health care deals in 2006.

The overall median deal size for a health care company grew to a record USD10m, up 33 per cent from USD7.5m in 2006. The largest health care deal in the fourth quarter was the USD62.5m later round for Cogentus Pharmaceuticals of Menlo Park, California.

Within the health care industry, the biopharmaceutical and medical device segments attracted record amounts of venture capital, with USD5.4bn invested in 327 biopharmaceutical deals, up 12 per cent over 2006, and nearly USD3.7bn put into 251 medical device deals, a near 37 per cent increase.

The IT industry posted a modest 2 per cent gain in investments over 2006, with USD14.8bn invested in 1,530 deals, seven fewer than the previous year. Within the sector, the most noteworthy story was the 44 per cent surge in investment in the information services segment, which includes most of today’s web-based innovations. Venture capitalists put USD3.7bn into 479 deals in this space.

While nowhere near the records set in 2000, last year the most investment in information services since then. The median amount invested in an IT deal remained unchanged from 2006 at USD7m. One of the largest – and most publicised – deals was a USD60m follow-on round raised by Palo Alto-based social network Facebook.

The business, consumer and retail sector saw a nearly 20 per cent decline in investment from 2006. Investors put roughly USD2.6bn to work in 260 deals in this area, down from USD3.2bn invested in 293 deals the previous year.

The report said California was again the top destination for venture capital investment in 2007, accounting for 42 per cent of all deals with 1,112 and 47 per cent of all capital invested with just under USD14bn. The San Francisco Bay area attracted the bulk of the state’s venture capital investment with 818 deals garnering USD9.9bn, 3 per cent more than 2006.

For the fourth year in row, southern California saw sizeable growth in investment with investors putting USD3.8bn to work in 272 deals, a 12 per cent increase in investment from 2006.

The Boston area posting its highest deal total since 2001 with 326 completed rounds. Venture capitalists invested USD3.7bn in the region, 19 per cent more than in 2006, with investments in biopharmaceutical companies passing the USD1bn mark for the first time.

The New York metropolitan region saw a slight increase in deals with 204, but capital investment fell for the second year in a row, dropping 9 per cent to USD2.1bn. Washington State posted increases in both deal flow and investment with 111 rounds and roughly USD1.4bn invested, a 27 per cent increase in capital invested over 2006 and the fifth consecutive year of investment growth.

Both the Potomac region and Texas saw deals and investments dip last year. Investments in Potomac-area companies fell 15 per cent to USD982m in 99 deals, while Texas saw investments slide 7 per cent to USD1.1bn in 95 deals.