SAN FRANCISCO, LONDON and SHANGHAI, Dec. 11, 2006 (PRIME NEWSWIRE) -- With $25.39 billion invested after the first three quarters of the year, venture capital activity in the U.S., Europe, China and Israel in 2006 is poised to hit a five-year high and register the highest annual investments since 2001, according to a global year end analysis by Dow Jones VentureOne and Ernst & Young. This year, investment is expected to top $32 billion after the fourth quarter. Global deal flow, however, remains constrained and is expected to fall slightly short of the 3,931 deals completed in 2005.
Along with the strong investment growth, the venture capital market has shown considerable interest in new markets such as China, where deal flow is poised to reach an all time high, and in emerging industries including the burgeoning "CleanTech" segment and Web 2.0. For example, a new analysis prepared by VentureOne and Ernst & Young has found that $761.4 million has been invested in clean technology on a worldwide basis so far this year, up 50% from $504.1 million invested after the first three quarters of 2005.
"The new wave of venture capital investments around the globe, particularly at the early stage, has been driven by a number of factors. First, demand for innovation in sectors such as Web 2.0, CleanTech and biotechnology is increasing in both mature and emerging markets. The positive exit environment and the end of the fund raising cycle in most markets is spurring investments. Venture-backed companies also have higher capital requirements today as the median time from initial VC financing to exit lengthens and the need to establish global operations comes earlier in their life cycles in the face of growing global competition. Finally, venture capitalists are responding to the need of large multinationals to get closer to the innovation pipeline, whether through partnerships with promising start-ups or acquisitions of innovative companies," said Gil Forer, global director of Ernst & Young's Venture Capital Advisory Group.
"Once again, this year has shown that venture capital follows a cyclical pattern with the cycle ramping back up in 2006 in conjunction with a new wave of global activity. This is particularly evident at the early stage, where a plethora of emerging venture-backed companies is aiming to improve the health of the planet and evolve the way we communicate with each other. In addition, the burgeoning consumer technology market and the rapid pace at which these advancements spread to consumers around the world, is providing much of the impetus for the solid growth of the global venture capital industry," added Steve Harmston, director of global research at VentureOne.
Key Venture Capital Metrics
Among the key venture capital metrics, the year has seen relatively robust levels of liquidity in the major geographic areas. That includes strong merger and acquisition activity for venture-backed companies in the U.S. and Israel. The U.S. has posted 311 venture-backed M&As at the third quarter, and Israel has posted 32, both up from last year's levels. Plus, the median amount being paid for those companies -- $50 million in both the U.S. and Israel -- has topped 2005 amounts in both countries. Year 2006 also has posted relatively steady venture-backed initial public offering (IPO) activity around the globe. In Europe, in particular, 56 have been completed through the third quarter, making it likely that Europe will complete the most venture-backed IPOs this year since 2000, thus potentially freeing up venture capital portfolios for further investment. But the size of IPOs, particularly in Europe, are at much smaller levels with only $1.22 billion cumulative raised in the European public offerings so far. The U.S. has had some success in the public markets as well, with 37 IPOs so far this year and $2.47 billion raised, putting it on path to exceed last year's level.
The amount being directed to worldwide venture capital investing has been on an upward trend since 2003 and this year has continued to build on that momentum with $25.39 billion invested after the third quarter. But global venture capital fund raising-at $24.22 billion, remains off the pace of last year, when it topped $33.18 billion due to particularly strong private equity funds in Europe.
"In India, venture capital investment activity has accelerated in the first three quarters of 2006 by both U.S. and local venture capital funds. We've seen as much as $178 million invested in 48 deals in India this year," said Mr. Forer. Among those deals were a $10 million investment by Sequoia Capital in AppLabs Technologies, a provider of software testing with offices in Hyderabad, and Travelguru of Mumbai, which was also funded by Sequoia Capital along with Battery Ventures this year.
Along with robust global investment, there was a striking amount of early-stage activity in 2006, particularly in the more established venture capital markets. For example, 42% of the completed rounds in Europe so far this year have been seed and first rounds, the most proportionally since 2001. In the U.S. 36% of the rounds have been seed and first rounds, the same percentage as last year, but the most since 2001.
"Overall, this infusion of early-stage activity is a positive sign for these established markets, indicating investors are finally able to venture past their existing portfolio companies and are seeing the significant potential in emerging areas and technologies," said Mr. Harmston.
Other evidence of the current status of the market is the median size of venture capital deals, which grew considerably in 2006, reaching $7 million in the U.S., $5.5 million in Israel, $5 million in China and $3 million in Europe after the third quarter.
"We have seen median deal sizes at their highest levels in at least six 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," said Mr. Forer.
Emerging Interest in CleanTech
Among the most positive signs in the venture capital market in 2006 is the considerable attention being focused on clean technology. For the purposes of the VentureOne and Ernst & Young analysis, clean technology was defined as a company that directly enables the efficient use of natural resources and reduces the ecological impact of production. Areas of focus include energy, water, agriculture, transportation, and manufacturing where the technology creates less waste or toxicity. The impact of "CleanTech" can be either to provide superior performance at lower costs or to limit the amount of resources needed while maintaining comparable productivity levels.
In the U.S. alone, $585.6 million has been invested to 60 companies focused on the area so far this year, already 30% more than was invested in all of 2005. Investors also are seeing strong potential, ramping up the size of deals to support these companies. The median investment so far this year in the U.S. is $7.5 million, compared to $4.5 million last year for "CleanTech" companies. European investment in "CleanTech" is already 26% higher than was invested in all of 2005, at $102.4 million. Even China venture capital investment is following this trend, with nine deals and $74 million invested to date this year. China is also posting significantly larger deals in "CleanTech" with a median size of $6.3 million, up from $1.3 million last year.
Looking Forward
Looking forward to 2007, the improving liquidity landscape is likely to continue in the next year on a global basis, thus improving the overall level of investing along with it. The year will also likely see even more strengthening of new venture capital markets in Asia, along with additional investment focused on emerging areas of the Internet and the environment.
About VentureOne
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.
About Ernst & Young
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