Investors started to flirt with energy, entertainment.
Venture capitalists in 2006 continued to fund the same type of enterprise IT-focused companies as they have throughout the decade — namely those developing software, security, Internet and wireless offerings. But there are a few emerging areas such as entertainment and energy that are piquing VCs’ interest and may end up pulling dollars away from these core enterprise areas.
Venture capitalists in 2006 continued to fund the same type of enterprise IT-focused companies as they have throughout the decade — namely those developing software, security, Internet and wireless offerings. But there are a few emerging areas such as entertainment and energy that are piquing VCs’ interest and may pull dollars away from these core enterprise areas.
Last year investors poured $25.5 billion into 3,416 deals, 10% more deals than in 2005 and the highest level hit since 2001, according to the latest MoneyTree Report by PricewaterhouseCoopers (PwC) and the National Venture Capital Association. The report, which is based on data from Thomson Financial, was released Tuesday.
Investments in companies developing software remained relatively flat in 2006. But with $5 billion and 865 deals for the year, it was still the No. 1 sector for VC attention, says Tracy Lefteroff, global managing partner of PwC’s venture capital & private equity practice. Companies in the telecommunications market, another top sector, drew $2.6 billion in 2006 investments, slightly more than the year before.
VC investments in 2006 Software has led the top sectors for attracting VC dollars over the past few years, although newer areas such as media & entertainment and energy are growing faster. | ||||||||||||||||||||||||||||||||
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Looking ahead to how investment patterns may change for the rest of the decade, the top two deals of 2006 offer a clue.
The top deal of 2006 was a $209 million investment in Cilion, builder and operator of ethanol plants in the Western United States. The second largest deal was a $153 million investment in Amp’d Mobile, a Beverly Hills provider of mobile entertainment. These two deals exemplify the growing attraction for VC funds by the entertainment and energy sectors.
This is actually a second attempt by VCs to gain traction in the world of entertainment, says Steve Krausz, general partner with US Venture Partners, which invests about 75% of its fund on IT-related companies. The first attempt was during the Internet craze of the late 1990s, when the advertising base required to fuel this industry wasn’t mature enough, he says.
“Now the economic imperative is really set in place, so I think you will see a growth in the near term and this could be an important area of long-term investment,” Krausz says. However, he adds that key to success in the entertainment industry is being able to gauge consumer preference and taste, which can be tricky. “These are hard things for VCs to make a clear, economic-based and rational-based ROI model on. But it’s promising,” he says.
Energy is also attracting some significant attention. According to Terry McGuire, managing general partner at Polaris Venture Partners, co-partner and Ethernet inventor Bob Metcalfe is “working diligently in this space.”
“We’re evolving into these growing spaces and trying them out,” McGuire says. “Over the next decade we’re going to see some very interesting energy and digital media ideas.”
Another report on investments, the Quarterly Venture Capital Report released Monday by Ernst & Young LLP and Dow Jones VentureOne, also highlighted investor interest in growing industries including “Web-heavy information services” and alternative energy.
