Web 2.0 Investments Up in 2007 But Likely Close to Peak—New England Second to Silicon Valley

Turn your attention for a moment from the Bear Stearns debacle to the Web 2.0 world, where the news isn’t quite as depressing, but where investment may be peaking, according to a new report by Dow Jones VentureSource. The company bases this assessment on the fact that there was only a 25 percent increase in the number of deals between 2006 and 2007, from 143 deals to 178. From 2002 through 2006, by contrast, the number of deals was doubling every year.

On the other hand, the total amount of dollars invested in 2007 was up nearly 88 percent over 2006, to a whopping $1.34 billion. The only caveat there is that 22 percent of that money, at least $300 million, all went to one company, Facebook. The company raised $240 million in a corporate fundraising round, plus at least $60 million more from individual investors. The next largest Web 2.0 deal was for Ning, a company that allows users to create their own social networking site. Ning, like Facebook based in Palo Alto, raised $44 million.

But much of the action was outside of Silicon Valley, with a big chunk here in New England (meaning, essentially, Massachusetts, plus one company in Connecticut). VentureSource lists 20 deals in 2007, up from 15 in 2006, for a total investment of $158 million (see list below for regional totals), exactly double the previous year. The New York Metro area had more deals—25, up from 9 the previous year—but those only amounted to $58 million. And the total number of deals in the San Francisco Bay Area actually dropped from 74 in 2006 to 72, including Facebook. Take Facebook out of the picture, and investment dollars in Silicon Valley were down 3 percent.

Of the top three Bay State companies—and this definitely puts a pall on the local news—one is struggling and one is out of business. N2N Commerce, of Cambridge, MA, raised $30 million from General Catalyst Partners and Limited Brands, the biggest chunk of venture capital locally. But the ecommerce company, which aimed to let retailers manage their sales across the Internet, their catalogs, and physical stores, went belly up over the holidays. The number three fundraiser, Boston-based Eons, which was at the time a web portal for the over-50 set, pulled in $22 million (much of it, incidentally, also from General Catalyst), but wound up laying off a third of its staff and redesigning its social networking site to appeal to a wider—younger—audience. (The top 10 New England deals are also listed below).

VentureSource didn’t say that the second largest deal in New England last year was Sermo, also of Cambridge, which runs an online community of doctors, but we figured it out. Sermo closed a Series C round for $26.7 million in September. The company also had the sixth biggest deal, a $9.5 million Series B back in January ’07.

Web 2.0, by the way, refers to those companies that offer some sort of user participation through a dynamic interface and include user-created content, networking, or collaboration. Examples would be podcasting, tagging, blogs, social networking, mashups, and wikis. Xconomy is a Web 2.0 company and was ranked in a tie for 17th-19th place on VentureSource’s list, with about $1 million raised.

Jessica Canning, director of global research for Dow Jones VentureSource, says Web 2.0 companies are relatively inexpensive investments, which makes them attractive to venture capitalists. With just a few million dollars, they can have web presences attracting users and advertisers. But she adds that 2008 could be the make-or-break year for companies that rely on advertising. “The slumping economy, coupled with a slowdown in click-through rates for online advertising, is going to pose a real challenge to their ability to generate revenues and position themselves for an exit,” she said in a press release.

Here’s VentureSource’s list of 2007 Web 2.0 investments by region:

Bay Area — $721 million, 72 deals

New England — $158 million, 20 deals

Pacific Northwest — $140 million, 13 deals

Southern California — $115 million, 14 deals

New York Metro — $58 million, 25 deals

Southeast — $47 million, 7 deals

Mountain (CO, AZ, UT)—$31 million, 7 deals

North Carolina — $10 million, 2 deals

Texas — $4 million, 2 deals

And here are the top 10 deals in Massachusetts in 2007:

1. N2N Commerce, Cambridge, MA — $30 million, first round
2. Sermo, Cambridge, MA — $26.7 million, third round
3. Eons, Boston, MA — $22 million, second round
4. uLocate Communications, Framingham, MA — $11 million, later stage
5. EveryZing, Cambridge, MA — $10.5 million, first round
6. Sermo, Cambridge, MA — $9.5 million, second round
7. Awareness, Waltham, MA — $7 million, first round
8. Acquia, North Andover, MA — $7 million, first round
9. RatePoint, Needham, MA — $6.5 million, first round
10. Peermeta, Acton, MA — $6 million, first round

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