Fewer hi-tech firms raise more funds in Q3

The trend towards greater investment in later stage companies was confirmed in a report released by Dow Jones VentureOne and Ernst & Young LLP.

October 22, 2007 08:16
3 minute read.

Seventy-four hi-tech companies raised some $350 million in venture funds during the third quarter, about 10 percent more than 80 companies raised in the second quarter and 39% above the levels raised by 66 companies in the third quarter of 2006, the accounting firm Kesselman & Kesselman, PriceWaterhouseCoopers said in a Money Tree report on Sunday. "The investments that we have seen in Israeli hi-tech companies and the developments that they have made testify to the strength of the venture capital sector in this country," said Joseph Fellus, a partner, advisory and hi-tech practice leader at Kesselman & Kesselman, PwC. "We will continue to see higher numbers in terms of VC money invested in Israeli hi-tech as long as the companies here continue to perform like they are now." On average, the amount raised by these companies was $4.7m. compared to $4m. in the second quarter and $3.8m. a year earlier, the report said, noting that the majority of the funds were invested in companies either in mid or late stage-level development stages, while the remainder was divided between early development stage companies. Sixty-one mid- and late-stage start-ups raised $314m., accounting for 90% of the total amount raised by tech companies during the third quarter, and the largest since the third quarter of 2004, a span of 10 quarters. Most investments by venture capital funds in mid and late-stage start-ups were follow-on investments. Last week the Israel Venture Capital Research Center reported that Israeli technology companies raised $414m. in capital from venture funds and other private investors in the third quarter, a 9% increase from a year earlier. According to that report, the average amount raised by a company fell 9% from a year earlier to $3.82m. Israeli VCs accounted for a substantial piece of the investment action, The Money Tree report said, as they allocated some $160m., or 46% of total third-quarter VC funding, a rise of only $1m. from the second quarter, but of more than $35m. above 2006 figures. According to Money Tree, of the 74 hi-tech companies that raised money here in the third quarter, the 48 that are listed as Israeli accounted for a combined $179m., or 51%, of the VC funds allocated during the period. The remaining companies are listed as foreign-based, with the majority of them from the US. Meanwhile, among the various technology sectors, investment in software companies accounted for $83m. (24%) of the total funds, while life sciences companies raised $72m. (21%) and communications and networks companies raised $63m. (18%). Producers of semiconductors raised $53m., or 15% of the total, while the remaining 22% of the money was raised by Internet or media-based companies. The trend towards greater investment in later stage companies was confirmed in a separate a report released over the weekend by Dow Jones VentureOne and Ernst & Young LLP. According to that study, overall US venture capital investment climbed 8% during the period from year-ago levels to reach $8.07 billion, according to the report. This marked the ninth consecutive quarter of gradual year-over-year growth in dollars invested in the US and is the highest quarterly investment total since the first quarter of 2001. The Dow Jones/E&Y report showed that 635 deals were completed during the quarter, down by 41 deals from the third quarter of 2006. Two-thirds of all capital invested in the third quarter - some $3.8b. - was invested in 224 later rounds, the most invested in late-stage companies since 2001, while combined seed- and first-round investment remained steady year-on-year at $1.74b. These sizable later rounds helped to push the overall median for a venture capital deal in the third quarter to $7.92m., a new record. "The third quarter reinforced that there are innovative and exciting private companies across the industries in which VCs invest," said Joseph Muscat, the US Director of the Ernst & Young Venture Capital Advisory Group. "Fueling this innovation are the larger deal sizes seen this quarter. The overall level of investment and larger deal sizes are suggestive of a continued bullish view of these companies' prospects and liquidity options." The quarterly report also showed surging investment in the Energy and Advanced Specialty Materials & Chemicals sectors, categories that include the majority of today's "clean technology" companies, while Information technology (IT), the largest investment area overall, saw 10% fewer deals and 5% fewer dollars invested than during the same period last year. The data showed that there were 367 completed venture rounds for IT companies, accounting for $3.77b. Energy investments jumped 28% compared to the third quarter of 2006 with $590m. put to work in 33 deals, records on both accounts.

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