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“2005: A Good Year for Venture Capital Investments” by Roman Kikta
by Roman Kikta    Tue, Feb 21, 2006, 12:40 AM

2005 was a successful year for startup investments as venture capitalists poured $21.7 billion in 2,939 deals according to the MoneyTree Survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association. This was a slight increase from 2004’s $21.6 billion invested. More significant, first-time financings by venture capitalists hit a four-year high with 901 companies receiving their first round of institutional venture capital for a total of $5.3 billion in 2005. In contrast 865 companies attracted $4.6 billion in 2004. This increase reflects venture capital firms’ improved appetite for new, unproven companies with strong growth potential to balance existing portfolio investments.

On a national level, the Life Sciences sector (Biotechnology and Medical Devices industries, combined) hit a five-year high with $6.0 billion in 608 deals which accounted for 28% of all venture capital investments. There was a 10% slip in Software investments 10% to $4.7 billion in 840 deals. However, it should be noted that Software maintained its position as the largest single industry category with 22% of total dollars and 29% of all deals. The Networking industry also experienced a decrease to finish at $1.4 billion. Although the Telecommunications industry category has seen decay in recent years, the Wireless sub-category continues to surge. For full year 2005, 152 wireless-related companies received $1.3 billion, a 24% increase over 2004’s $1.1 billion. This increase pushed the Telecommunications category to a three-year high of $2.1 billion in 2005.

Other industry categories that experienced increases in 2005 were IT Services, Industrial/Energy and Financial Services. Other major categories were either relatively stagnant. Internet-specific investing has grown slowly over the last three years with 2005 ending at $2.9 billion in 450 deals, up slightly from $2.8 billion in 2004. Companies classified as Internet-specific represented 13% of all venture dollars and 15% of all deals in 2005.

On a regional basis, our home state of Texas continues to maintain its position as the third most active state in the country with investments totaling approximately $1.06 Billion in 158 deals for the year.

Texas 2005 Breakdown by quarter:

1st Quarter $341 Million in 43 deals

2nd Quarter $226 Million in 36 deals

3rd Quarter $207 Million in 37 deals

4th Quarter $295 Million in 42 deals

 

Texas Fourth Quarter 2005 Highlights:

Total Amount Invested: $295,487,000   

Average Investment per company: $7,035,405

Number of Deals: 42

Sector: 

 

Amount

% of Total

Deals

Telecommunications

 

$95M

32.25%

8

Software

 

$64M

21.57%

11

Financial Services

 

$28M

9.31%

4

Business Products and Services

 

$25M

8.30%

1

Industrial/Energy

 

$22M

7.43%

3

Semiconductors

 

$20M

6.68%

5

Biotechnology

 

$12M

4.06%

2

Networking and Equipment

 

$9M

3.17%

2

Healthcare Services

 

$7M

2.27%

2

Media and Entertainment

 

$6M

1.92%

1

Medical Devices and Equipment

 

$5M

1.80%

1

Electronics/Instrumentation

 

$4M

1.23%

1

IT Services

 

$0M

0.00%

1

It should be noted that over 50% of financings in Texas were related to telecommunications and software companies directly reflecting the continued surge of the Wireless and Internet companies.

As I stated in my previous blogs, wireless and internet growth is incessant. With the emergence of WLAN/Hotspot VOIP and Wimax technologies and the continuing introduction of new sleek mobility devices targeted at consumers, from special 2 or 3 button cell phones for kids as well as new services offering hip-hop ring tones to IP TV, delivering “Desperate Housewives” and other programs to the device. I believe that the wireless sector will continue to bear fruit in 2006-- ripe for some M&A activity.  VCs will continue to play its critical role in funding innovations of the next generation Internet, the Wireless or Mobile Internet. Currently, technology is the lead focus for 51 percent of the venture capital community. This is expected to remain relatively stable over the next five years. Technology comprises software, communications/ networking, information services, semiconductors, electronics and hardware.

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