SAN FRANCISCO, Sept. 21, 2006 (PRIMEZONE) -- The newest wave of Internet start-ups, dubbed Web 2.0, are gaining momentum at a substantial pace in the U.S. venture capital market this year. According to a new research study from Dow Jones VentureOne, the publisher of VentureSource, 49 Web 2.0 companies have been funded in the first half of 2006, garnering $262.3 million in equity capital. That compares to 51 deals and $199.1 million invested into similar companies in all of 2005, indicating activity is likely to double last year's level.
Because of the significant level of attention being focused on the so-called Web 2.0, VentureOne's research department adopted a strict methodology for categorizing potential companies, reviewing them on a case-by-case basis to determine if they met specific criteria. Companies included in this study have a business model that revolves around a dynamic interface facilitating participation through such methods as user-created content, networking, and collaboration. Applications used include podcasting, tagging, blogs, social networking, mashups, and wikis. Technologies used in these applications include: AJAX, RSS, SOA, CSS, XHTML, Atom, and rich Internet applications. Although VentureOne also tracks venture capital investment in Europe, China, and Israel, this study only included companies headquartered in the U.S.
While the investment levels are growing, so far the data shows that Web 2.0 is a relatively small portion of the market. For comparison's sake, a total of $13 billion was invested in 1,213 U.S. venture-backed companies in the first half of this year. The deal size remains smaller as well. The median size of a Web 2.0 financing round this year is $4.4 million, compared to $7.5 million for a venture financing overall.
"Whether over-exposed or not, Web 2.0 companies have clearly attracted serious investment from venture capitalists. But in terms of total deal flow and investment levels, these Web 2.0 companies are raising venture capital on par with the smaller industry segments we track, such as healthcare services, retailers, and medical software and information systems," said Steve Harmston, director of global research for VentureOne. "Still, the growth in this area is impressive. Since 2002, deal flow and investments to Web 2.0 companies have increased year over year, along with a fairly consistent pattern of new companies being funded."
To illustrate, some 65% of the Web 2.0 deals so far this year have been seed- and first-round deals. Last year, there were even more: 75% of the deals were for these early-stage financings. But in a sign that these companies also are maturing, seven later-stage deals were completed in the first two quarters of 2006. That compares to zero later-stage deals in any of the last three years.
Also noteworthy for the Web 2.0 companies is their breakdown by stage of business. More than half the companies (25) receiving investments in 2006 were generating revenue, including three which were identified as profitable. None of the financings in 2005 went to profitable companies. Those revenue generating companies also received 61% of the total investment.
However, the category appears too new for considerable liquidity activity. None of the venture-backed Web 2.0 companies have achieved an IPO to date, and fewer than 10 have been acquired, including such companies as del.icio.us and MySpace, Inc.
As a result, the majority of Web 2.0 companies are not receiving the significantly increased valuations going to the overall venture capital market. For example, the median pre-money valuation for a Web 2.0 company this year is $5 million, but the median pre-money valuation for a U.S. venture-backed company as a whole is $20 million, so far this year.
In terms of recent financings, consumer focus appears to be king: the majority of the Web 2.0 rounds funded this year (27) were listed as IT consumer services companies, receiving $165.3 million. This industry segment dominated the Web 2.0 activity last year as well, representing about half of the total 51 deals and garnering $78.3 million of the total capital.
Among the largest Web 2.0 deals this year are Facebook (Palo Alto, Calif.), which received a $25 million second round and Zimbra (San Mateo, Calif.), which received a $14.5 million later round.
The most active investors in Web 2.0 this year include Accel Partners, General Catalyst Partners, and Draper Fisher Jurvetson. When compared over a longer period -- since 2001--the most active investors include those three along with Sequoia Capital and Omidyar Network.
The investment figures included in this release are based on aggregate findings of VentureOne's proprietary U.S. research. This data was collected by surveying professional venture capital firms, through in-depth interviews with company CEOs and CFOs, and from secondary sources. These venture capital statistics are for equity investments into early-stage, innovative companies and do not include companies receiving funding solely from corporate, individual, and/or government investors. No statement herein is to be construed as a recommendation to buy or sell securities or to provide investment advice.
Dow Jones VentureOne (www.ventureone.com and www.venturecapital.dowjones.com), a unit of Dow Jones Financial Information Services, has been the leading provider of finance and investment data to the venture capital industry for almost 20 years. Dow Jones VentureSource, a sophisticated electronic database on the venture capital industry, is published by VentureOne.
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Dow Jones VentureOne Michelle Jeffers (415) 439-6666