US venture numbers on the rise

The second quarter of 2006 saw VC investment hit a five-year high with a surge of interest in healthcare deals. But there is still fear that if the IPO market doesn’t improve, investors could see a repeat of 2000. Dave Keating reports.

Some venture capitalists are hailing new data from the National Venture Capital Association, PricewaterhouseCoopers and Thomson Financial as a sign that the asset class has some smooth sailing ahead. The quarterly report issued yesterday shows that despite a lackluster IPO market, VC investment surged in the second quarter to levels not seen in five years, with VCs diversifying their investments.

The quarterly report shows that US venture capital investment has reached the highest level since 2002, fueled by growing enthusiasm for start-up biotech companies and alternative energy firms, as well as a steady interest in internet companies.

The report found that venture firms invested $6.3 billion in 856 deals in the second quarter of 2006, up two percent in dollars and five percent in deals from the previous quarter.

NVCA’s John Taylor remains concerned about low IPOs

Although internet-related companies are still seeing the bulk of VC investment, the biotechnology, industrial and energy sectors are seeing strong growth. VC investment in the life sciences sector as a whole increased 10 percent from the first quarter, and investment in the biotech sector alone rose by 34 percent.

“Biotech is clearly a key focus for the industry and that’s not going away,” says NVCA research and financial affairs executive John Taylor. “I think a lot of the increase we’re seeing there is frankly because some of these companies are becoming more mature and just starting to grow.”

Last week’s $365 million acquisition of Corus Pharma by Gilead Sciences is just the latest example of the strong market for healthcare acquisitions, and early stage companies are reaching a stage where they may be just a few years off from product development and an IPO or sale.

The NVCA findings echo similar data from Ernst & Young and VentureOne released earlier this week, which shows that the median size of venture deals rose to $7.5 million in the first half of 2006, the highest level since 2000. Fundraising seems to be consistently increasing. This year, Oak Investment Partners closed its 12th fund at $2.56 billion, the largest venture capital fund in history.

If the numbers get too big, there just won’t be the public market liquidity to take these companies public or to acquire them at a good price.

John Taylor, NVCA

Taylor cautions that there may not be enough public liquidity to support the rising investment if the numbers get too much bigger. With the number and valuation of IPOs remaining low, venture capitalists should keep a close watch on how much they’re investing.

“If the numbers get too big, there just won’t be the public market liquidity to take these companies public or to acquire them at a good price,” he says. “Right now we’re ok at these levels. But I would argue that overall public market liquidity is essential, whether your idea is to sell the company or have it go public. If you’re having it acquired, that’s less direct, but still, it’s Microsoft’s stock price that has made that company able to accumulate a lot of cash and buy other these companies.”

Steve Schwerin, a managing partner at Millenium Technology Ventures, agrees that the increased amount of investment will require some sort of solution to the IPO problem.

“The combination of increased venture investment and fickle IPO markets has led to an increase in the number and valuation of late stage investments,” he says. “This is forcing investors to get really creative about how they enter and exit attractive companies, ranging from secondary liquidity and tech buyouts to AIM listings and SPACs for venture capital liquidity.”