The 2006 Venture Capital Industry Report

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The 2006 Venture Capital Industry Report As the dot-com market of the late 1990s gathered momentum, venture capitalists stood at the nexus of hope and hype. In 2000, they poured nearly $95 billion into mostly young, untested companies, some no more than ideas, expecting to reap rich rewards by later selling many of these outfits to the public. But the bubble burst, the market for new stock issues tanked -- and by 2003, venture capital funding had dwindled to $19 billion.

Now, the VC industry shows signs of stabilizing. Bolstered by a strong fourth quarter, last year's financings exceeded the $21.5 billion invested in venture-backed companies in 2004, reaching $22.1 billion. While that's far below 2000's peak, it represents a more sustainable pace of funding both for venture investors and the entrepreneurs they support.

In another sign of the industry's firming, pension funds, foundations, and other investors are queuing up again to commit funds to venture capital firms, which provide seed money for young companies to grow on. In last year's fourth quarter, Palo Alto, Calif.-based Technology Crossover Ventures closed on a mammoth $1.4 billion fund, less than two years after raising $900 million. VC firms raised $22.2 billion in 2005, topping 2004's commitments of $18.7 billion.

In another departure from 2000, many venture capitalists are bypassing start-up companies to concentrate on those that are closer to coming public. In part, that's because the public markets have been less receptive to venture- backed deals in recent years, leaving many VC portfolios filled with more mature investments.

Take the outsized class of 2000: Of the 2,639 companies that venture capitalists initially backed that year, 1,044 or 40%, still were private as of the end of 2005 (a mere 35 were public, while the rest had been acquired or gone out of business). By pouring additional funds into these companies, their benefactors hope to pump up revenues to levels Wall Street will notice, and prepare them to comply with the costly corporate-governance requirements of the Sarbanes-Oxley Act, which applies to publicly traded concerns.

As for entrepreneurs seeking first-round venture funding, the bar has been set high. "Good-quality deals are going to find investors," says Steve Krausz, a general partner at U.S. Venture Partners in Menlo Park, Calif. "But people are focusing intensively on a couple of sectors, and neglecting others." ...

(INTRODUCTION TO THE 2006 VENTURE CAPITAL INDUSTRY REPORT | Grooming the Next IPOs)

2005 HIGHLIGHTS

Fundraising
Commitments to Venture Capital Funds / $22.2 billion
Median Fund Size / $200.5 million
Largest Fund >> Technology Crossover Ventures VI / $1.4 billion

Venture Capital Financings >> $22.1 billion / 2,239 deals
Seed Rounds >> $54.3 million / 63 deals
First Rounds >> $4.7 billion / 686 deals
Second Rounds >> $4.4 billion / 432 deals
Later Rounds >> $10.6 billion / 796 deals

IT Financings >> $12.0 billion / 1,276 deals
Largest Software Deal >> Webroot Software / $108 million
Largest Communications Deal >> Vonage / $200 million
Largest Semiconductor Deal >> Solarflare Communications / $48 million

Healthcare Financings >> $6.7 billion / 537 deals
Largest Biopharmaceuticals Deal >> FibroGen / $100 million
Largest Medical Devices Deal >> Small Bone Innovations / $42 million
Largest Medical Information Systems Deals >> Health Dialog / $171 million

Products & Services Financings >> $2.8 billion / 324 deals
Largest Business Services Deal >> Integro / $320 million
Largest Retail Deal >> Art.com Inc. / $30 million

Most Active Investors
Corporate Investors >> Intel Capital
Venture Capital Firms >> New Enterprise Associates

Median Pre-money Valuation >> $15.2 million
Seed Rounds >> $2.0 million
First Rounds >> $5.4 million
Second Rounds >> $14.0 million
Later Rounds >> $33.1 million

M&As >> $27.3 billion / 356 Transactions
Largest M&A >> Shopzilla / $570 million

IPOs >> $2.2 billion / 41 IPOs
Largest IPO >> Under Armour / $123.5 million

Download The 2006 Venture Capital Industry Report

PDF format, 1.6MB, 84Pages.

The 2006 Venture Capital Industry Report

EDITORIAL STAFF > John de Yonge, Russ Garland, Brian Gormley, Stephen Harmston, Michelle Jeffers |

DESIGN & PRODUCTION STAFF > Angie Espejo, Tuncel Gokcepinar, Susan Johnson, Ray-Michael Peterson, Tara Sapienza, Derrek Strickland, Tim White |

RESEARCH > Isaak Better, Jessica Canning, Arno Castanet, Jonathan Cohen, Valerie Foo, John Gabbert, Ryan Gessel, Joshua Grove, Stephen Harmston, Regina Hoshimi, Brendan Hughes, Shawn Jaswal, Hanne Lindoe, Michael Little, Courtney Lucas, Benjamin Moscatello, Alexis Perry, Ai Sato, Shimrit Shepherd, Martin Smith, Nicholas Smith, Toivo Rehemets, Daniel Wang, Silvia Zerbio |

BUSINESS AND PRODUCT DEVELOPMENT Charles D. Ramser, Jr.

DATA PROVIDED BY > Dow Jones VentureOne and Ernst & Young

TABLE OF CONTENTS:

2005 HIGHLIGHTS | Benchmark statistics in quick-reference format

INTRODUCTION TO THE 2006 VENTURE CAPITAL INDUSTRY REPORT | Grooming the Next IPOs By Russ Garland and Brian Gormley

STATE OF THE PORTFOLIO 2006 | Current status of the pool of venture-backed companies
By John de Yonge, Ernst & Young and Stephen Harmston, VentureOne

FUNDRAISING | Investment funds raised by venture capital and other private equity investors

COMPLETED FINANCINGS | In-depth financing details for the information technology, healthcare; and products & services sectors, plus round information, development stages and regional activity

VALUATIONS | How investors valued venture-backed companies throughout the year
LIQUIDITY | Statistics and analysis of the venture-backed IPO and M&A markets
INVESTORS | Who funded this year’s crop of venture-backed companies
SERVICE PROVIDERS | Rankings of VC-related investment banks, law firms, and accounting firms

EUROPE VENTURE CAPITAL REPORT | Overview of venture activity in Europe
ISRAELI VENTURE CAPITAL REPORT | Overview of venture activity in Israel

CHART & GRAPH INDEX
METHODOLOGY

Visit Dowjones VentureOne Official Website

VentureOne: Venture Capital and Private Equity Research and Information

There is no better source than VentureSource.
www.VentureSource.com

When Morgenthaler Ventures needed to create professional quality presentations on best deal practices in the venture capital industry, it turned to VentureSource. VentureSource gave them an accurate look at current and historic venture capital investments, company valuations, and performance benchmarks. Plus, with VentureSource Analytics, Morgenthaler Partners could manipulate the data quickly and easily, creating indepth overviews in minutes instead of days.

This is why venture capital firms like Morgenthaler use VentureSource:

to conduct due diligence
find comparable companies
identify trends
reveal an accurate, thorough picture of the market for investors
and be prepared for the next upswing.

“Thanks so much for your help pulling the data together for our offsite last week. It was a great meeting and everyone was blown away with the deep analysis we performed using the data from VentureSource.”
—DREW LANZA, General Partner, Morgenthaler Ventures

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