Worldwide, venture capital is pretty hot. But in some areas, and sectors, it's hotter than in others. The 2006 Global Venture Capital Investment Report, jointly published by Dow Jones VentureOne and Ernst & Young, finds that venture capital from the United States, Europe, China and Israel in the first three quarters of 2006 hit $25.39 billion and the volume for the whole year topped $32 billion, the highest level since 2001.
Despite the record amount of global capital investment in 2006, total trading volume still declined, leaving the total number of transactions for the whole year slightly below that of 2005.
Major venture capital markets sustained momentum in 2006. In the United States and Israel, mergers and acquisitions (M&As) targeting venture-backed companies remained active. In the third quarter, 311 venture-backed M&As were completed in the United States and 32 in Israel, more than the number in the same period in 2005.
Venture capital company IPO activity in 2006 also showed strength. By the third quarter of 2006, 56 deals had been completed in Europe and IPO transaction volume generated by venture capital companies was expected to hit the highest level since 2000, which may result in a greater outflow of venture capital to other sectors.
The size of IPO deals, however, was much smaller. Europe, in particular, saw only $1.22 billion in IPO fundraising. The United States saw active IPO trading: 37 deals totaling $2.47 billion in 2006.
European VC slowdown
A total of 27 venture capital funds in Europe raised 1.62 billion euros in 2006, down from 2.86 billion euros from 39 funds in the same period in 2005.
"Despite the remarkable decline in European venture capital funds, the gross volume of the funds still surpasses the aggregate of 2003 and 2004," said Steve Harmston, Director of Global Research at VentureOne. "There was a decline in venture capital funds, as compared with the United States, in terms of activity, growth of acquisitions and private equity capitalization."
In 2006, the amount of initial input in venture capital activity in terms of seed money and first-stage investment was stunning, with the situation particularly evident in mature venture capital markets. For instance, of all completed investments in Europe in 2006, 42 percent were seed-stage and first-round investment, a ratio unmatched since 2001; in the United States, contributions from seed-stage and first-round investment accounted for 36 percent, the highest since 2001, and equaling the level of 2005.
"On the whole, for mature markets, the vitality found in initial investment activities sends a positive signal, indicating that investors have finally transcended the boundaries of existing investment categories and spotted the huge potential that emerging industries and new technologies encompass," Harmston said.
In 2006, venture capital trading also saw an increase in the median of single venture capital deals. Up to the end of the third quarter, such venture capital-based median values in the United States, Israel, China and Europe hit $7 million, $5.5 million, $5 million and $3 million, respectively.