Capital Markets

VC Investment Surged in 2007

Activity was especially stong in the fourth quarter, when private-equity deals were practically non-existent.
Stephen TaubJanuary 22, 2008

Last year was the best for venture-capital investment in U.S. companies since 2001, a new Dow Jones report says.

There were 2,648 VC deals in 2007, slightly ahead of 2006, with total investment of $29.9 billion, up 8 percent, according to the Quarterly Venture Capital Report from Dow Jones VentureSource.

The year finished strongly, with 650 deals worth $7.3 billion completed in the fourth quarter, representing growth of 6 percent and 15 percent, respectively, over the year-earlier quarter.

Venture-capital deal activity contrasted somewhat with that of the private-equity market. While leveraged buyout volume also set a record last year, that was all based on a strong first half; in the latter half of the year, the market virtually dried up due to the credit crunch touched off by the sub-prime mortgage crisis.

The volume of U.S.-based private-equity deals closed last year was $521.8 billion, more than double the $240.4 billion recorded for 2006, according to Dow Jones Business News, citing Dealogic. However, fewer deals closed — 408 versus 564 — suggesting the market was fueled by mega-buyouts.

VC volume fell by more than half in the third quarter, and in the fourth quarter it dropped to the lowest quarterly total in at least three years, according to the wire service.

Why were venture-capital deals surging late last year while private-equity deals were falling apart or not getting done? Blame the credit crunch. You don’t need outside financing to complete a VC deal. The venture capitalists are the financing.

For a private-equity deal a big bridge loan first must be secured, then deal sponsor needs to line up permanent financing from banks or the public markets, which is typically syndicated if it is a big deal. Financing for such deals was virtually unattainable after August. And many tentative deals fell apart when the buyers realized they overpaid after the music stopped.

Venture capitalists, on the other hand, put record amounts of capital to work with biopharmaceutical, medical-device, and energy-related companies right through year-end, while also ramping up investments in Web-related technologies, according to the Dow Jones VC report.

The median size of a VC round in 2007 was $7.6 million, up from $7 million in 2006 and the highest since 2000.

For the third year in a row, seed investments and first-round deals accounted for the largest slice of activity — 975 deals, or 38 percent of the total. Later-stage financings, however, attracted the most capital, with some $14.3 billion (roughly half of all capital invested) put into 900 rounds.