MoneyTree VC report: Bubble isn't the problem... unsustainable investments

VC investment is booming but is at unsustainable levels...something has to change.

The latest MoneyTree Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters:

-Q2 2011 VC investments jump 19% to $7.5 billion in 966 deals. Year ago: $6.3 billion in 814 deals

- Latest quarter is highest total since Q2 2008.

These high levels are not sustainable says Mark Heesen, president of the NVCA:

“For the past three years, the venture capital industry has been investing significantly more dollars into companies than it has been raising from institutional investors. This level of investment cannot continue if we do not start to see a pick-up in exits and, subsequently, fundraising. The money simply will not be available to invest. Ironically, our industry should be much less concerned about a bubble and more concerned about being in a position to adequately fund the tremendous opportunities out there in the next decade.”

But some sectors have had good exits and that is fueling investments.

Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC US:

"The exit market for both biotech and medical device companies has been active over the past year, and this has encouraged VCs to put more money back to work in this space. It also makes sense that we're seeing an increase in VC investments going to Internet companies, when you take into account the valuations on some IPOs that have priced recently, particularly in the social networking space. As long as the markets continue to reward these companies with attractive valuations, we would expect to see a strong level of venture capital funding in that space."

He added that at current levels 2011 could become the sixth most active year for VC investments in history.

Q2 Highlights:

Industry

- The Software industry received the highest level of funding for all industries with $1.5 billion invested during the second quarter of 2011. Up 35 percent in dollars compared to the $1.1 billion invested in the first quarter. The Software industry also had the most deals completed in Q2 with 254 rounds, which represents a 25 percent increase from the 203 rounds completed in the first quarter.

- Biotechnology industry returned to second place, rising 46 percent from the prior quarter to $1.2 billion in the second quarter of 2011. The number of deals also rose in the second quarter, increasing 20 percent to 116 from 97 in the first quarter of 2011.

- The Medical Devices and Equipment industry also experienced an increase, rising 26 percent in Q2 to $841 million, while the number of deals remained relatively flat at 90 deals in Q2.

- Investment in Internet-specific companies surged in the second quarter with $2.3 billion going into 275 companies. This level of investment represents a 72 percent increase in dollars and a 46 percent increase in deals from the first quarter when $1.4 billion went into 189 deals.

The second quarter marks the most dollars going into Internet-specific companies in a decade, since the second quarter of 2001.

- Ten of the 17 MoneyTree sectors experienced double-digit increases in dollars in the second quarter, including IT Services (19 percent increase), Media & Entertainment (27 percent), Consumer Products & Services (248 percent), and Semiconductors (22 percent increase).

Stage of Development

- Seed and Early stage investments rose 24 percent over the prior quarter in both dollars and deals with $2.4 billion going into 464 deals in the second quarter. Seed/Early stage deals accounted for 48 percent of total deal volume in Q2, compared to the first quarter when it accounted for 46 percent of all deals. The average Seed deal in the second quarter was $3.2 million, up from $1.8 million in the first quarter. The average Early stage deal was $5.8 million in Q2, down slightly from $6.0 million in the prior quarter.

- Expansion stage dollars increased 9 percent in the second quarter, with $2.3 billion going into 260 deals. Overall, Expansion stage deals accounted for 27 percent of venture deals in the second quarter, down slightly from 28 percent in the first quarter of 2011. The average Expansion stage deal was $9.0 million, down from $9.3 million in the prior quarter.

- Investments in Later stage deals increased 24 percent in dollars and 16 percent in deals to $2.8 billion going into 242 rounds. Later stage deals accounted for 25 percent of total deal volume in Q2, compared to 26 percent in Q1 when $2.2 billion went into 209 deals. The average Later stage deal in the first quarter was $11.5 million, which increased from $10.8 million in the prior quarter and represents the largest average deal size for Later stage companies since the first quarter of 2004.

First-Time Financings

- First-time financing (companies receiving venture capital for the first time) dollars increased 30 percent and the number of deals rose 22 percent with $1.5 billion going into 310 deals. First-time financings accounted for 20 percent of all dollars and 32 percent of all deals in the second quarter, compared to 18 percent of all dollars and 31 percent of all deals in the first quarter of 2011.

- Companies in the Software, Biotechnology, and Media & Entertainment industries received the highest level of first-time dollars. The average first-time deal in the second quarter was $4.8 million, up from $4.5 million in the prior quarter.

- Seed/Early stage companies received the bulk of first-time investments, garnering 61 percent of the dollars and 77 percent of the deals, an increase from 56 percent of dollars and 75 percent of deals seen in Q1 2011.

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