Global Venture Capital Investment in Web 2.0 Companies on the Rise
Nearly US$850 Million Deployed to Web 2.0 Deals in 2006, According to Ernst & Young/Dow Jones VentureOne Data Released at Annual Web Ventures Conference
SAN FRANCISCO, March 21, 2007 (PRIME NEWSWIRE) -- Venture capitalists continued to favor the innovative activity of Web 2.0* companies, deploying substantial sums in the segment throughout 2006, according to the latest data released by Ernst & Young and Dow Jones VentureOne at the Web Ventures Conference in California. The global research showed that US$844.4 million was directed into 167 deals last year, more than twice as much money and nearly twice as many deals as occurred in 2005.
The research demonstrated a continuing trend that has seen the amount of worldwide venture capital invested into Web 2.0 practically doubling in size every year since 2002. However, most of the growth remains centered in companies based in the U.S. and Europe.
"Web 2.0 is certainly a very fast-growing segment of the overall venture capital market right now. However, based on the median size of Web 2.0 deals and the conservative level of pre-money valuations for these companies, the data does not indicate that we are entering bubble territory," said Stephen Harmston, Director of Global Research for VentureOne. "Rather, what we are seeing is robust investment activity aimed at a still emerging business area."
The median pre-money valuation for a Web 2.0 company in 2006 was US$6 million for both U.S.-based companies and worldwide. This is considerably more modest than the US$18.5 million overall median pre-money valuation reported for US venture-backed companies and also below the US$7 million overall median pre-money valuation for European venture-backed companies. The median size of a Web 2.0 deal on a global basis was US$5 million in 2006, an increase from the $3.3 million median the year before. The median size of a financing round was also US$5 million in the U.S. and China, but was actually higher in Europe last year at US$6 million.
"The Internet has impacted every sector from media to retail to hospitality and consumer products. Now through Web 2.0 offerings, the Internet is having a profound influence on the way we share, collaborate and interact socially, not just in developed markets but also in fast growing emerging markets," indicated Gil Forer, Global Director of Ernst & Young's Venture Capital Advisory Group. "From the investor perspective, the low capital requirements, potential high return and the faster time from development to revenue are the primary drivers of the increase in venture capital investment in the Web 2.0 segment. In addition, success stories such as YouTube have had a positive impact both on entrepreneurs and investors," added Forer.
The research shows that on a global basis, Web 2.0 is still in an early stage and there remain relatively few liquidity exits for companies in this space, although there have been particularly noteworthy ones like Google's (NASDAQ: Goog) US$1.65 billion acquisition last year of YouTube. In addition, because of the nature of this kind of business-which does not seem to require a tremendous amount of technology infrastructure-the research shows that individual deals are relatively modest. Among the largest Web 2.0 financing deals of 2006 was the US$30 million first round investment in n2N Commerce, a software company that provides cross-channel, on-demand, e-commerce solutions for large retailers.
This is just one illustration of Web 2.0 moving beyond the realm of a social networking or blogging operation and into true business applications. In fact, among the largest Web 2.0 deals that occurred in the U.S. last year, there were many more commercial applications for Web 2.0 including client/server connection software and commercial services in areas like online real estate, travel, news, and entertainment content.
On a geographic basis in 2006:
* The US dominated the Web 2.0 market, with 126 deals and US$682.7 million invested, an 83% increase in deals from 2005 and a 136% increase in capital.
-- On a sub-regional basis, the San Francisco Bay Area was the busiest region in the US for Web 2.0 deals and was home to more than half of all financings last year. The New York metropolitan area, Southern California and New England also saw tremendous growth in deal flow and investment over 2006.
* Europe has also shown significant interest with 20 deals in 2006, up from four deals in 2005. The amount invested in Europe, US$100.5 million, is more than a 200% increase from 2005.
-- Within Europe, France posted the most activity with seven deals and US$39.3 million invested in 2006. -- Five Web 2.0 deals were completed in the United Kingdom last year, raising US$23.4 million in investment capital.
* China posted 21 Web 2.0 deals. This was the same number that occurred in China in 2005-indicating a flattening of that market. Investment declined by 26% to US$61.3 million.
* Israel had two venture-financed Web 2.0 deals in 2006 and US$22 million invested, a jump from one deal and only US$1 million invested the year before.
* The most active investors in Web 2.0 on a worldwide basis are Benchmark Capital, Draper Fisher Jurvetson, Sequoia Capital, and Omidyar Network.
* Note to editors: VentureOne has adopted a strict research methodology for categorizing Web 2.0 companies, reviewing them on a case-by-case basis to determine if they meet specific criteria. Companies included in this study have a business model that revolves around a dynamic interface facilitating participation through such methods as user-created content, networking, and collaboration. Applications include podcasting, tagging, blogs, social networking, mashups, and wikis. Technologies used in these applications include: AJAX, RSS, SOA, CSS, XHTML, Atom, and rich Internet applications.
The investment figures included in this release are based on aggregate findings of VentureOne's proprietary research. This data was collected by surveying professional venture capital firms, through in-depth interviews with company CEOs and CFOs, and from secondary sources. These venture capital statistics are for equity investments into early-stage, innovative companies and do not include companies receiving funding solely from corporate, individual, and/or government investors. No statement herein is to be construed as a recommendation to buy or sell securities or to provide investment advice.
Dow Jones VentureOne (www.ventureone.com and www.venturecapital.dowjones.com), a unit of Dow Jones Financial Information Services, has been the leading provider of finance and investment data to the venture capital industry for almost 20 years. Dow Jones VentureSource, a sophisticated electronic database on the venture capital industry, is published by VentureOne.
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