Venture funding climbs, refocuses on start-ups

Venture funding in the information technology sector continues to grow, according to a pair of recent reports, with early-stage companies seeing more investments than they have in previous years.

According to the MoneyTree Survey, published quarterly by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association, venture capitalists invested $5.6 billion in 761 companies during the second quarter of 2004, up from $5.0 billion invested in 686 companies during this year’s first quarter. The report also showed that early-stage companies — defined as having a product in the pilot or test phase — received 30 % of that funding, a level not seen since the second quarter of 2002.

A similar report issued by Ernst & Young and VentureOne on Monday pegged second-quarter investments at $5.1 billion in 509 deals. That report showed 32% of investments were for companies in the seed and first-round stages, the highest percentage since 2001. 

The MoneyTree Survey, released Tuesday, showed investments in networking and equipment companies during the second quarter totaled $459 million, up from $397 million in this year’s first quarter. Of the 44 networking deals signed this quarter, 13 were with early-stage companies, compared with only three in the last quarter. While this trend could signal a renewed interest in networking start-ups, “it’s too early to tell if the category is recovering,” says Tracy Lefteroff, global managing partner, Venture Capital & Private Equity Practice at PricewaterhouseCoopers.

The telecommunications sector saw a small dip in the amount of investments, falling to $518 million in the second quarter from $547 million during the quarter before, according to the MoneyTree Survey. Of the 59 investments made in this sector during the second quarter, the majority went into companies developing wireless technology, Lefteroff says.

As it often does, the software sector garnered the most investments during the second quarter, totaling $1.2 billion in 212 deals, compared to $1 billion in 182 deals during the first quarter.

As venture funding continues to rise, there also appears to be a return to merger and acquisition activity, according to Chad Waite, a venture capitalist with OVP Venture Partners. This could be because public companies’ valuations are rebounding, making their stock a viable currency, or because these companies are becoming more optimistic about the economy in general, he says. “There are six or seven companies entertaining discussions for being acquired in our portfolio,” Waite adds.