SAN FRANCISCO — With early-stage investments showing new strength during the second quarter, venture capitalists reported the largest number of deals since 2001.
There were 977 deals, up 15.6% from the 856 funded in the first quarter of this year and up 6.1% from the 920 deals funded during the second quarter of 2006.
Venture capitalists invested $7.12 billion during the recent second quarter, according to statistics released last week by the National Venture Capital Association of Arlington, Va., Pricewaterhouse-
Coopers LLP of New York and Thomson Financial, a New York unit of Stamford, Conn.-based Thomson Corp.
The investments represented a 2.5% increase from the $6.9 billion invested during the second quarter of 2006, but a drop of 4.1% from the $7.43 billion invested in this year’s first quarter.
The results are solid and indicative of rising optimism, said Roland Van Der Meer, managing partner of ComVentures LP in Palo Alto, Calif., which has $1.5 billion of VC assets under management.
Seed-level deals
“From a Silicon Valley perspective, we see big changes happening and lots of opportunity,” he said. “There’s a tremendous sense of booming.”
The reemergence of seed level deals is notable because it shows that VC firms are embracing a long-term mentality, according to Mark Heesen, president of the National Venture Capital Association.
Venture capitalists put $1.8 billion into 340 first-time deals in the second quarter, compared with $1.7 billion in 252 deals in the first quarter.
“It shows that [the VC industry] continues to be long-term oriented, and we’re looking for life-changing companies,” Mr. Heesen said.
But the abrupt cooling of the private-equity market because of credit tightening at banks represents a potential cloud on the horizon for venture capitalists, he added.
Just as the industry is reestablishing its reputation for discipline and patience, it could face new temptations, according to Mr. Heesen.
“It impacts us in that we turned money away, and where did that money go — hedge funds and buyout funds,” he said.
“If investors don’t do well in buyouts, will they try to get back into VC and drive us into a bubble? Hopefully, we can maintain some discipline,” Mr. Heesen said.
The greater fear in Silicon Valley is that the slowdown in private-equity deals will spread to the VC market, Mr. Van Der Meer said.
For example,
private equity could become a less viable option for exiting deals, according to both Mr. Heesen and Mr. Van Der Meer.
But Tracy Lefteroff, the San Jose, Calif.-based managing partner of PricewaterhouseCoopers’ VC practice, said he thinks that VC firms will be unscathed by the private-equity slowdown.
“Leveraged buyouts have their own issues with debt,” he said. “VC [firms] rely almost solely on equity.”
Positive outlook seen
Yet the positive signs outshine the potential concerns, Mr. Lefteroff added. “What we’re seeing is a very sustainable” level of investment, he said. “The outlook is good. I don’t see any bubble on the horizon.”
What contributes greatly to the industry’s health is that venture capitalists bogged down in old deals have recently been freed up. A strong market for initial public offerings and acquisitions in the technology sector — in addition to VC firms’ cutting their losses by discontinuing their support of some companies — has opened up space on their calendars.
“Most VCs are constrained more by how many boards they can sit on, not by capital,” Mr. Lefteroff said. “If [mergers-and-acquisitions] activity slows down, you’re being relieved of that burden.”
