Is the Slump Over? Report Shows Venture Capital Deals Ended Three-Year Slide in 2004

RESEARCH TRIANGLE PARK — _______________________________________________________________________________________

"We saw many new companies formed in 2004, in part as the result of the opening of the liquidity market, which makes the exit path more apparent, and in part as the result of the increased number of new funds raised by venture capital firms." - John Gabbert, Venture One. _______________________________________________________________________________________Driving by a surge in early-stage deals, venture capital firms broke a three-year decline in 2004 by investing more than $20.4 billion.

That's the word from Venture One and Ernst & Young, which announced the figures on Friday. The increase came despite a slowdown in the fourth quarter.

The total investments represented an 8 percent increase from the $18.7 billion for 2003 even though the number of deals was not much different, Venture One and Ernst & Young reported.

VC deals for 2004 were still below the $21.7 billion invested in 2002, but this is the first year since the peak of 2000 that the amount in deals was not smaller than the year before.

According to Venture One and Ernst & Young figures, $94.5 billion in deals were made in 2000 then fell off sharply to $36 billion in 2001, $21.7 billion in 2002 and $18.7 billion last year.

The average deal size topped $7 million.

In good news for startups and entrepreneurs, seed and first-round deals climbed to 33 percent of all deals, an increase of 2 percentage points from the previous year. The number of deals for startups soared 58 percent, and the dollar amount was 34 percent higher.

The news was especially positive in the fourth quarter with the early deals hitting 37 percent of the overall total.

Funds focused on new ventures also were hot in raising money.

"We saw many new companies formed in 2004, in part as the result of the opening of the liquidity market, which makes the exit path more apparent, and in part as the result of the increased number of new funds raised by venture capital firms, which now can be directed to longer-term commitments to promising start-ups," said John Gabbert, vice president of worldwide research for Venture One.

"The second half of 2004 appears to have been a particularly strong one for closing new funds aimed at the next wave of entrepreneurial companies," he added. "Venture One's preliminary estimate for funds raised in 2004 is in the $16-17 billion range, which stands in contrast to the $8.7 billion raised in 2003."

As Wall Street rallied throughout 2004, the effect spread to the initial public offering markets and also generated more interest in mergers and acquisitions. The report, the report said, was the increase in deals.

"Several positive factors came together in 2004 to mark the beginning of a new venture-capital cycle, including increased venture-backed IPO and merger-and-acquisition exits, recovering valuations, and renewed fundraising activity by venture-capital firms," said Bryan Pearce, Ernst & Young's New England Venture Capital Advisory Group Leader, in a statement.

"The increase in early-stage investment in 2004, a rise of 17% to a total of $4.1 billion in seed - and first-round deals - the highest figure since 2001 - is a reflection of the venture-capital community's confidence in the prospects for long-term success," he added.

Fourth-quarter deals produced $4.5 billion, a 15 percent drop from 2003, and 8 percent lower than in the third quarter.

Biotech deals generated 20 percent of all venture deals with 228 transactions.

Information technology investments climbed to $11.3 billion, up $900 million from the previous year. Electronics and information services deals were up 20 and 21 percent respectively.

Venture One: www.ventureone.com