Venture-capital investment totaled $5.6 billion in the second quarter, its highest in two years, according to the MoneyTree survey by PricewaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Association. VC investment is on pace to exceed $20 billion this year after totaling $18.8 billion in 2003, its lowest since 1997.

The $20 billion pace is reasonable considering that the total capital market is $10 trillion, says Bob Pavey, a partner of Morgenthaler Ventures, an $850 million VC fund.

Software remains the biggest magnet for VC investment, attracting $1.2 billion in the second quarter and $2.2 billion in the first half of the year, outdistancing biotechnology, which garnered $1.9 billion in the first half. Software was No. 1 by far in number of deals in the second quarter, with 212 out of a total of 761.

Early-stage investments were $1.2 billion in the second quarter, a two-year high. Expansion-stage investments were $2.8 billion, half of overall VC investments for the quarter.

First-time investments were also at a two-year high, attracting $1.2 billion in the second quarter. Software companies attracted $250 million in first-time investments, topping biotech, which got $185 million.

The increase in early-stage investments is a sign that later-stage companies are gaining traction, allowing VC firms to focus on startups. "The first-round candidates of today are the IPO candidates of 2010," says John Taylor, VP of research at the National Venture Capital Association.

Companies making software for connecting devices to multiple LANs and wide area networks are viewed as good bets, says Sanjay Subhedar, a partner at Storm Ventures, whose $310 million portfolio is weighted toward early-stage companies. With the growing use of cell phones, PDAs, and other mobile devices, he says, computing is becoming more ubiquitous, creating a demand for software that can scale to any size platform.