by Roman Kikta    Fri, Feb 16, 2007, 04:45 pm

There has been a surge in venture capital investment in 2006 with over $32 billion invested on a global basis. According to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Financial, while U.S. companies remain the primary investment target for venture capital with approximately $25.5 billion invested in 3,416 deals in 2006, U.S. venture capitalists are continuing to expand to a more global investment focus, specifically targeting China and India. U.S. based venture capitalists invested $856 million in 71 deals in India and $1.1 billion in 105 deals in China.

This renewed out flowing of venture capital investments around the globe, was characterized by significant growth in the life sciences sector. In the US alone, biotech and medical device investing both reaching record high levels with $7.2 billion in 731 deals. Telecom companies received $2.6 billion over 294 deals. The wireless subsector accounted for 44 percent of the Telecom sector in terms of dollars, with 128 deals garnering $1.2 billion. Other areas of growth included Media & Entertainment with $1.6 billion going into 299 deals, Industrial and Energy with 183 companies receiving $1.8 billion and Internet-Specific companies Internet-specific companies received $4.0 billion in 645 deals. First-time seed & early stage financings reached the highest level since 2001 accounting for 34% and $5.8 billion going into 1,176 deals, while 957 later stage companies received investments of $9.3 billion.   On a regional basis, Texas continues to be the perennial distant third place finisher with $1.38 billion invested in 176 companies, as compared to California with $12.24 billion over 1,445 deals and Massachusetts with $2.82 billion in 368 deals.

All of this investment activity, in particular, has been driven by a number of factors. First, demand for innovation in sectors such as Web 2.0, energy and biotechnology is increasing in both mature and emerging markets. Second, the positive exit environment including the sale of Youtube to Google for $1.65 billion and the sale of MySpace to News Corp for $580 million, is fueling a resurgence of interest in “web 2.0” companies. Furthermore the end of the fund raising cycle in most markets is spurring new investments. Today, venture-backed companies have greater capital requirements as the median time from initial VC financing to exit lengthens. Finally, venture capitalists are responding to the need of large multinationals to get closer to the innovation pipeline, whether through partnerships with promising start-ups or acquisitions of innovative companies.

I believe that 2007 will witness a strong and stable investment climate with opportunities across a diverse group of industry sectors with particular investment focused on emerging areas of the Internet and the environment and global regions specifically Asia and Eastern Europe. Coupled with an improving liquidity landscape, there are strong indications that the venture capital community will be betting on alternative exits rather than IPO, I believe that most VC funds will outperform the public markets in 2007.

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