Venture funding reaches five-year high in Q1

Venture capitalists put more dollars behind fewer companies in the first quarter of 2007, marking the highest amount invested in start-ups since the fourth quarter of 2001.

While companies in the life-sciences and medical-device industries experienced an unusually high amount of funding, IT start-ups also garnered a significant chunk of the $7. 1 billion invested in 778 deals during the first quarter of this year, according to the MoneyTree Report. PricewaterhouseCoopers and the National Venture Capital Association compiled the report based on data by Thomson Financial.

Significantly, the first quarter of 2007 saw venture investments break out of the $5 billion-to-$7 billion quarterly range seen over the last five years. In addition, more later-stage investments were made during this period than first-time or early-stage investments. These two factors signal that VCs may be pouring their money into companies that are on the verge of going public or getting acquired.

“One quarter doesn’t constitute a trend, but the breakout [of the $5 billion to $7 billion range] bodes well for the rest of 2007,” says Darrell Pinto, director of global private equity performance with Thomson Financial.

First-quarter investments in software companies fell 10% from the previous quarter to $1.1 billion, but it was still the second-largest category in terms of dollar value for investments following biotechnology.

Telecommunications deals climbed 16%, in terms of dollars, over the previous quarter, to reach $588 million. Wireless companies made up $356 million of that telecom total, with Amp’d Mobile, a wireless entertainment service, comprising $108 million of that figure.

Investments in Internet companies jumped 31% over the last quarter, to $1.3 billion, marking the highest quarterly level in five years, according to the report, which defines this category as including companies with business models that fundamentally depend on the Internet.

One venture capitalist who invests in consumer and corporate-focused companies says a new twist on the search phenomenon pioneered by Google and Yahoo is catching investor attention; while no start-up will be able to replicate the business model of these giants, some are taking a vertical approach to search.

“There’s continued interest in the search side of things . . . with the emergence of some smaller companies [developing] vertical search . . . a number of companies are getting funded targeting a variety of different markets within search,” says

Ullas Naik, partner with Globespan Capital Partners. One example is Splunk, which has developed a software community for searching IT system events.

Networking companies saw $275 million in funding, up from $209 million during the fourth quarter of last year. Media and entertainment companies continue to woo investors, with a 16% increase in funding from the previous quarter, to $489 million.

This year the MoneyTree Report has added clean tech as a category, encompassing start-ups with products and services related to alternative energy, pollution and recycling, power supplies, and conservation. During the first quarter, VCs put $264 million into these companies, the report says.