December Surge of Internet Deals Carries Venture Capital to Two-Year High

1/13/11Follow @bvbigelow

A wave of Internet deals helped venture funding during the fourth quarter of 2010 reach a two-year high-water mark in both the number of deals and capital invested, according to CB Insights, a New York information and data services company tracking the innovation economy.

Venture capital firms poured a total of more than $6.5 billion into 735 deals during the last three months of 2010, according to CB Insights’ Q4 2010 Venture Capital Activity Report. That represents an 18 percent increase in capital invested and a 6.9 percent rise in number of deals, compared with the $5.5 billion and 687 deals counted during the fourth quarter of 2009.

Annual venture funding in 2010 amounted to $23.7 billion invested in 2,792 deals, a 14 percent gain in funding and 13 percent increase in deals over 2009, when CB Insights found a total of $20.8 billion invested in 2,461 deals for the year.

Capital invested during the fourth quarter was boosted, though, by four mega Internet deals that closed in December. The four deals together accounted for $965 million of the $1 billion gain over the $5.5 billion that was invested during same quarter in 2009.

CB Insights included $500 million of the $950 million Groupon deal in the fourth quarter of 2010 (the Groupon deal was announced in December but closed in January), according to CB Insights co-founder Anand Sanwal. Other December deals that helped buoy the numbers were Kleiner Perkins’ $200 million investment in Twitter, Amazon’s $175 million funding for LivingSocial, and a $90 million venture investment in Whale Shark Media, which was largely used to acquire Australia’s RetailMeNot.

With four deals accounting for such a big share of the capital invested, it’s difficult to extract meaningful trends from the investment increase seen in the quarterly data. But as my Xconomy colleague Wade Roush says, it’s unwise to write off mega deals like Groupon and Twitter altogether. They’re still a sign that VCs are willing to invest heavily in some venture-backed companies.

“There is more optimism than we’ve observed in the recent past, especially when it comes to tech,” CB Insights co-founder Anand Sanwal said in an e-mail. “The momentum and valuations of some breakout companies like Facebook and Groupon, coupled with the hopes of a healthier M&A and even an IPO market, have investors feeling more bullish. But it’s worth remembering that the 2010 total of $23.7B, while better than 2009, is lower than the annual totals seen between 2006-2008.”

CB Insights provides the big picture in their snapshot of venture investing, and more details on deals and funding in Xconomy cities is expected when rival surveys come out in the MoneyTree Report and from Dow Jones VentureSource. In the meantime, here are some other bullet points from CB Insights’ report:

—Venture funding for Internet companies soared by more than 71 percent during the quarter, to more than $2.54 billion from $1.48 billion in the fourth quarter of 2009. Again, those four big deals in December account for most of the difference. A better indicator might be the deal count, which increased by 21 percent year-over-year, to 272 deals from 224 deals.

—Venture funding for healthcare companies fell by almost 16 percent, to more than $1.5 billion from $1.8 billion in the fourth quarter of 2009. The deal count increased slightly, to 173 from 169, year over year.

—Venture funding for what CB Insights calls Green Tech/Clean Tech increased almost 40 percent during the quarter, to $790 million from $565 million. The deal count, though, remained relatively flat, increasing to 59 from 55 in the fourth quarter of 2009. CB Insights noted that the deal count for early stage cleantech investments declined to a five-quarter low, while the top two areas for investment continue to be companies specializing in renewable energy and energy efficiency. Three of the top 10 green deals in the quarter were in Colorado.

—Among the top states, the most venture activity continued to take place in California, which accounted for 42 percent of the 735 deals and 40 percent of the $6.5 billion invested. Massachusetts had 11 percent of the deals and 10 percent of the overall funding, while the state of Washington had 4 percent of the deals and 2 percent of the funding. (Michigan, alas, was not among the top five states for venture activity that CB Insights analyzed.)

—Among states, CB Insights noticed that New York could be gaining ground on Massachusetts (at least in some respects) as the second-busiest region for venture activity. For the quarter just ended, the report found that $630 million was invested in 78 deals in Massachusetts, while $466 million was invested in 66 deals in New York State. Throughout 2010, venture capitalists invested almost $2.7 billion in 336 deals in Massachusetts, while nearly $1.4 billion was invested in 220 deals in New York. But the differences are narrowing in certain sectors. Over the past five quarters, CB Insights says it counted $1.22 billion in funding for 208 tech deals in New York, versus $1.21 billion in funding for 207 companies in Massachusetts. “The margin of victory for NY is ever so slight,” CB Insights says, “but most striking is the trend for both states, which are going in very different directions.”

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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