10.24.2005
Venture Capitalists Return to Internet Investments
It's looking almost like 1999 again in Silicon Valley, with Internet investments snaring a significant increase in funding from venture capitalists in the third quarter.
Venture capitalists, who invest in private companies with the hope of cashing out later at a big profit, poured $2.56 billion into Internet start-ups in the just-ended period, according to a report to be made public today from research firm VentureOne and Ernst & Young LLP. That's up nearly 37% from the $1.87 billion invested in the comparable period last year, the firm said. VentureOne is a unit of Dow Jones & Co., publisher of the Wall Street Journal.
The Internet deals -- likely inspired by the stock-market success of Web firm Google Inc. -- accounted for 47% of all venture financings in the quarter ended Sept. 30, compared with a 37% share of fundings in the year-earlier period.
Total venture investments rose more modestly, by about 9%, to $5.49 billion. That was up from $5.02 billion during the same period last year.
"It is the Internet, and the consumer Internet in particular, that is vibrant," said Steve Baloff, a general partner with Advanced Technology Ventures in Palo Alto, Calif.
Mr. Baloff says many companies are receiving funding because they have figured out how to use online advertising, often generated by links to popular search sites like Google, to make money from users who are visiting their own Internet sites.
Though some venture capitalists warn that competition for some deals is becoming too intense, and pushing up the prices investors will pay for stakes in small companies, Mr. Baloff believes the overall investing climate is more rational than six years ago.
Other types of information-technology companies, including those in the communications field, also pulled in more capital during the third quarter.
The biggest venture-financing deal for any company was the $150 million raised by FiberTower Corp., a San Francisco firm which makes wireless infrastructure equipment for cellular towers, VentureOne said. Next in size was the $62.5 million raised by Replidyne Inc., a biopharmaceutical company based in Louisville, Colo. that specializes in developing anti-infective drugs.
The amount of venture money invested in health-care companies declined slightly, to $1.66 billion, from $1.71 billion in last year's third quarter. But there were 11 more deals -- 140 in total -- than in the comparable quarter last year.
Most venture capitalists relied on mergers or sales of the companies for a return on their investments. Though the total raised through venture-backed mergers and acquisitions in the quarter actually declined, to just under $6.02 billion from $6.21 billion, the median value of each deal surged, to $59.5 million from $35.5 million in last year's third quarter, the report noted.
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