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Where VCs Are Putting Their Money in 2010

A slight resurgence in the IPO market and an upswing in M&A activity mean venture capitalists have some hopes of exiting investments.

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The motto of the venture capital industry this year could be: Well, anything is better than 2008 and 2009.

Driving such a renewed sense of optimism is the relative resurgence in the IPO market and a strong pickup in mergers-and-acquisitions activity. That means VCs now at least have some hopes of exiting investments after an almost two-year drought in both areas.

Nine venture-backed companies went public in the first quarter of 2010, raising $936 million, more than double the amount raised during the fourth quarter of 2009, according to data from Thomson Reuters. But to really get a sense of the improvement, look back to the first quarter of 2009, when not a single VC-backed company went public.

Not all industries are created equal in the eyes of the public markets, however. Four of the IPOs were in the information-technology sector and three were biotechnology companies.

That trend holds steady among mergers and acquisitions of venture-backed companies as well. In the first quarter of 2010, a record 111 VC-backed M&A deals were reported with an aggregate value of $5.6 billion, Thomson Reuters said. Once again, the IT sector led the way, accounting for 81 deals with a disclosed value of $2.3 billion. All of that activity is in no small part being driven by the need of cash-rich companies like Apple and Google to find the next big thing in areas like mobile advertising.

For its part, Google spent $145 million on nine companies in the first quarter, apart from the $123 million it spent on publicly held On2 Technologies, according to a regulatory filing. Given the size of the deals, it's likely most, if not all, were privately held and backed by VC investments.

Apple wasn't so kind as to disclose its acquisitions so plainly, but the tech giant is reported to have bought two VC-backed companies for undisclosed sums in April alone: Siri, maker of a voice-recognition search application, and Intrinsity, an Austin-based semiconductor maker.

Moving away from the tech world, medical and health was the next busiest industry, with 13 M&A transactions with a known value of $1.8 billion. Biotech saw eight companies trade hands with a disclosed total value of $1.2 billion, making it the third most-active industry.

It follows that the easiest industries to exit will be the ones that attract the most VC dollars. Indeed, the biotech industry received the highest level of funding for all industries in the first quarter with $825 million going into 99 deals, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association. The software industry received the second most investment funds with $681 million and completed the most deals of any industry with 144.

However, both biotech and software experienced large drops in fundraising, underscoring the still-skittish state of the VC industry. Dollars raised by the biotech industry fell 24 percent compared to the fourth quarter of 2009. Software funding fell 25 percent over the same time.

Digging a little deeper, there is evidence of one particularly hot area for investment: clean technology. That sector, which crosses many traditional industries and comprises alternative energy, pollution and recycling, power supplies, and conservation, saw an 87 percent increase in funding dollars over the fourth quarter, reaching $773 million. The increase in clean technology investments was driven by several large rounds, including five of the top 10 deals, the MoneyTree Report noted.

It's also worth pointing out that VCs are still showing serious signs of risk aversion, preferring to park their money in better-known quantities. Of the more than $4.7 billion invested in the first quarter of 2010, 37 percent went to companies in an expansion stage and nearly 33 percent went to later stage companies, according to the MoneyTree Report. Just 21 percent went to early-stage companies and start-up or seed stage companies attracted a measly 9 percent.

Last updated: May 24, 2010




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