Making Sense of These AdVENTURous Times

By Tim Hurley, Managing Director
BluePoint Venture Marketing

At the mid-way point of the year, a number of interesting developments have occurred in venture capital investing. Several promising signs are appearing across the landscape – more cash is being raised and invested; fewer, but larger “mega funds” from the bigger players are being launched and some eye-popping valuations on Internet companies have become hip again.

All of this activity has caused some market watchers to wonder if we are headed “Back to the Future” – circa 1999, the time period marked by the all-too-familiar “irrational exuberance.” Others argue that this scenario is highly improbable. What’s more likely is that this IS the future – we are living in a new investment era designated by significant spikes, followed by slight declines and/or periods of reduced funding activity. And the by-product of this development would be a corresponding slowdown in innovation.

This recent investment uptick has not been lost on the national media. Red Herring, once the size of a major metropolitan phone book and arguably the poster child for all that was wrong about the excesses in 1999, recently ran a headline “The New Bubble?” suggesting that we are headed into a major danger zone. Even the usually staid New York Times and BusinessWeek have joined the fray with recent headlines that included “A Few Signs of Froth Do Not a Bubble Make” and “It Feels Like 1998 All Over Again” – concurring that there are parallels between today and the late 1990's.

So while this debate rages, one thing is certain: the amount of capital being raised by investment firms is currently at its highest point in four years. Barring a major slowdown in investment activity later this year, VCs in 2006 will exceed the $26 million raised last year. This should be good news for entrepreneurs in the technology, consumer tech and biotechnology sectors.

A look at the recent top two quarterly venture capital reports is certainly encouraging.

VC funding in Q1 was fairly frothy VC funding in the first quarter of 2006 can be described as fairly frothy. According to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association based on data provided by Thomson Financial, more than $5.6 billion was invested in 761 deals. To put this figure into some perspective, total dollars invested in Q1 2006 match the investment level from Q4 2005. Perhaps an even more encouraging data point is the 12 percent investment increase over the same period a year ago.

The latest numbers from the Quarterly Venture Capital Report released by Dow Jones VentureOne and Ernst & Young show similarly positive signs.

Their Q1 2006 report noted that VC investing in the United States spiked 18 percent over a year ago, surpassing $6.2 billion across 564 deals, and the highest level since the first quarter of 2001.

The Dow Jones VentureOne and Ernst & Young data reveal that Information Technology is making a strong comeback. Their Q1 report reveals 327 deals for a total of $3.36 billion—a 13 percent increase in capital and nine more deals than in the year-earlier period. This is the most funding activity in the IT sector since Q2 of 2004.

Also noteworthy for the IT segment was the fact that $727.7 million was directed toward seed- and first-round deals in the quarter. That is the most capital investment in early-stage IT companies since the fourth quarter of 2001. About 32% of all the IT deals in the first quarter were early-stage rounds, about the same percentage as a year ago.

In sports parlance, this solid start would be the equivalent of scoring three runs in the top of the first inning against last year’s Cy Young award winner. Or perhaps a closer analogy would be the marathoner who has registered a five-minute mile pace for the first five miles of what is always a grueling undertaking.

The question is: can this pace continue or was this merely a flash in the plan?

That question might not be answered for the next several months and years. Regardless, entrepreneurs must continue to exhibit patience and prudence and continue to invest in growing their businesses. Consider recent comments made by Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers. Lefteroff observed, “It takes a more mature company to reach a successful exit, especially if that exit is through the narrow IPO window. And, it takes considerable time and money to reach that level of maturity. The opportunity still exists…. but they're having to find new ways to ensure their company stands out among the sea of start-ups.”