Venture-capital investing hits a 6-year high

Although venture-capital investing hit a six-year high in the first quarter in the U.S., experts say it's not the beginning of a bubble, but rather the start of a more diverse industry.

In the first quarter of 2007, venture capitalists invested $7.1 billion, making it the highest quarterly amount since the end of 2001, according to the MoneyTree report being released today by PricewaterhouseCoopers, the National Venture Capital Association and Thomson Financial.

While the total invested increased, the number of companies receiving funding fell in the quarter, compared with the fourth quarter of 2006, meaning that more money went to fewer deals.

On Monday, Dow Jones VentureOne and Ernst & Young, in a competing survey that tracks deals slightly differently, reported similar figures.

Although more dollars and fewer deals may be an indication that company valuations are being inflated, industry experts said during a conference call Monday that the numbers are sustainable and the environment is not too frothy. They listed several reasons why: a more inviting stock market; more acquisitions; the amount of capital available; and a greater diversity of industries raising capital.

"The breadth of investing in a wide variety of industry segments and in companies across varying stages of maturity indicates a healthy balance between short- and long-term opportunities," said Tracy Lefteroff, a managing partner at PricewaterhouseCoopers's venture-capital practice.

"We're seeing solid levels of investing in traditional industries that are being complemented by renewed interest in promising, fast-growing niches."

Tidbits from MoneyTree

Here are some of highlights from the report being released today:

• Biotechnology unseated the software category as the single largest industry sector receiving investments.

• The media and entertainment sector increased 16 percent, to $489 million in 72 deals.

• Telecommunications increased 27 percent to $588 million in 63 deals.

• Companies that have business models dependent on the Internet captured $1.3 billion, a 31 percent increase, the highest quarterly level in five years.

• A new clean-tech category received $264 million in 23 deals, a 41 percent increase in dollar value over the fourth quarter.

• Other industry categories that experienced dollar increases in the first quarter include: IT services; networking and equipment; retailing and distribution; industrial and energy; electronics and instrumentation; and computers/peripherals.

In Washington, $365.9 million was invested in 33 deals, following the same pattern seen nationally. It is the largest quarter since first quarter 2001, and more dollars went to fewer deals than in the fourth quarter, which saw $277 million invested in 38 companies.

For the past couple of years, in conference calls the MoneyTree report has hosted, the consensus among VCs and industry representatives has been that a national investment level of between $4 billion and $6 billion is healthy. In Monday's conference call, however, there was little sense of the market being overheated with investments exceeding $7 billion.

"I think the key thing is we are still within the range — we are still significantly less than the height of the bubble," said John Taylor, vice president of research at the National Venture Capital Association.

Participants in the call shared a number of examples to support the argument that the industry was seeing sustainable and healthy growth. One reason cited was the diversity of companies receiving investments.

For example, the biotechnology category unseated software as the single largest industry sector — more than 100 biotech deals were closed during the first quarter for a total of $1.5 billion.

In addition, the MoneyTree report created a new category called "clean tech," which includes companies doing business in alternative energy, recycling, power supplies and similar sectors. In the first quarter, venture capitalists invested $264 million in 23 deals in the category, a 41 percent increase in dollar value over the fourth quarter 2006.

"I don't think it's an aberration. The trend over the last five years was that things were gradually increasing. I think long term the momentum is positive," said Darrell Pinto, a director for Thomas Financial's Private Equity Performance.

Tricia Duryee: 206-464-3283 or tduryee@seattletimes.com