VC Investment Ends Year On Upswing

Venture-capital funding in the fourth quarter was at its highest level since the summer of 2002, according to the VentureOne-Ernst & Young Venture Capital Report.
Venture-capital investment in the fourth quarter showed renewed signs of growth, with $4.5 billion invested in 496 financing rounds--the highest quarterly numbers since the summer of 2002, according to the VentureOne-Ernst & Young Venture Capital Report issued Monday.

The fourth quarter also saw a hefty upsurge in early-stage financing, with seed and first-round financing accounting for 31% of total deals, the first time that's occurred in more than a year. The majority of those deals were for software. "We are optimistic that continuing strength in the capital markets will translate into increased early-stage investment in 2004," says Gil Forer, global leader of the Ernst & Young Venture Capital Advisory Group.

The amount of money invested also rose in early-stage financing rounds, by 35% for seed and first rounds combined. In addition, there were 123 second-round financings, the highest level since the third quarter of 2002. Software continues to be the most active segment, with 145 financing rounds completed in the fourth quarter, a 13% increase. Biopharmaceuticals was second with 73 deals, up from 40 in the third quarter.

The report also notes that venture-capital activity in the San Francisco Bay area--a traditional bellwether for the venture-capital sector--was relatively strong, with more than $1 billion invested last quarter in the region's IT companies.

For the year, U.S. venture-capital investment slipped to $16.9 billion in 1,884 financings, a drop of 20% and 15%, respectively. Still, the fourth-quarter's robust activity ended the year on a positive note. Says John Gabbert, VentureOne VP of worldwide research: "Venture-capital activity appears to be trending upward."