Venture Spending May Be Poised For A Comeback - InformationWeek

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Software // Enterprise Applications

Venture Spending May Be Poised For A Comeback

Venture-capital investing may be emerging from its 2-1/2-year doldrums, though investors remain picky about where to put their money.

VC investment rose to $4.3 billion in the second quarter, up from $4.0 billion the quarter before, according to PricewaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Association's MoneyTree survey. Startup funding rose to $956 million, compared with $668 million in the first quarter, and 669 companies received funding, up from 647.

Venture capitalists specializing in IT are in the market for new investments and startups to fund, according to Venture Partners, an executive-search firm that surveys venture firms. It found that 86% of the 48 firms polled are more actively deal hunting than a year ago, with 69% concentrating on early-stage investments.

Software was the top business-technology category, raking in $864 million, compared with $810 million in the first quarter. Companies focusing on business, communications and networking, and security software were the big winners. Telecom companies got $615 million in funding versus $507 million in the first quarter. Internet and wireless communications, along with E-commerce vendors, got 67% of the telecom total.

The quarter's biggest deal: InPhonic Inc. received late-stage funding of $56 million from Technology Crossover Ventures, according to Ernst & Young VentureOne. InPhonic builds privately branded online stores such as AOL Wireless, handling order fulfillment and online activation. It filed intent with the Securities and Exchange Commission in November to make an initial public offering.

VC firms are looking closely at a company's revenue prospects before investing, and entrepreneurs are being asked to pony up bigger portions of stock in return for funding. "It's an arduous process to attract venture capital," InPhonic's CEO David Steinberg says. "The valuations are going down, which means that venture-capital firms are being very opportunistic."

Deals are smaller, with the average deal size falling to $6 million last quarter, from a peak of $13 million in 2000. "We're seeing more pacing of investments," says John Taylor, VP of research at the National Venture Capital Association, "with smaller amounts coming out more frequently than one large round."

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