2004 expected to surpass 2003 for US venture, says research

US venture capital investing dipped in the third quarter of the year with $4.3bn invested in 601 companies according to the Money Tree Survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association. That figure was below the previous quarter of $5.9bn but equal to the figure of $4.3bn in Q3 2003. Over the past two years, quarterly investing has floated between $4.2bn and $5.9bn. In general, the decline in the third quarter was spread proportionately across the board.For the first nine months of 2004, venture capital investments totalled $15.3bn compared to $13.3bn during the first nine months of 2003. At the current pace, full year 2004 is expected to exceed the total of $18.7bn in 2003. The life sciences sector (biotechnology and medical devices industries) continued to dominate as it has for the past nine consecutive quarters. Investments in the sector totalled $1.26bn or 29% of all venture capital. Proportionately, investment in life sciences remained near historical highs. A total of 127 life sciences companies received funding in the third quarter. The software industry remained in the top slot as the largest single industry category. $942m was invested in 160 software companies. Software companies accounted for 22% of all venture dollars, a figure that is typical of their historical position. The telecommunications sector continued to languish as it has for the past two years, attracting $450m, or 10% of all venture capital. Of the 58 companies funded, most were follow-on rounds. The networking industry followed a similar pattern with $314m, or 7% of total dollars with 43 companies funded. Most other major industry categories experienced similar, proportionate declines. The exception was an increase in the business products and services industry, which was entirely attributable to one very large deal.Early-stage companies held their own in the third quarter. A total of 181 companies attracted $840m, or 30% of all deals and 19% of all dollars. Both percentages are similar to the prior quarter. Average funding per company was $4.6m, essentially unchanged from the prior quarter. Further, the average post-money valuation of early-stage companies held steady at $12.5m for the 12 months ending Q2 2004. Expansion stage companies typically account for the largest total dollars and number of deals, and that trend continued in the third quarter of 2004. Expansion stage funding was $2.1bn going into 267 companies, amounting to 49% of all dollars and 44% of all deals; both percentages are consistent with historical norms. Average funding per company at $8.0m was in line with the average of the prior four quarters. The average post-money valuation for the 12 months ending Q2 2004 rose to $55.1m, compared to $51.5m for the period ending Q1 2004.Later-stage funding also conformed to historical norms. Investments in Q3 2004 were $1.3bn or 30% of all investing. Average funding per company was down slightly to $9.9m, compared to the $10.2m average of the last four quarters. However, the average post-money valuation held steady at $71.8m for the 12 months ending Q2 2004. First-time financings fared slightly better than overall venture investing indicating that venture capitalists continue to fund new enterprises while supporting existing portfolio companies. A total of 182 companies received venture capital for the first time, or 30% of all companies funded in the third quarter - proportionately higher than any time in the last two years. In dollar terms, first-timers attracted $1bn, or 23% of all dollars, also above recent norms. Software companies accounted for the most first-time fundings with 44 companies getting $192m. The life sciences sector followed with 18 biotechnology companies and 12 medical device companies receiving a combined total of $232m. Four other industries had 10 or more first-time financings. However, networking continued to lag with only 4 companies attracting $30m.

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