Venture industry likes health, Web, energy

By Eric Auchard

SAN FRANCISCO (Reuters) - U.S. venture capital investments rose 8 percent to $25.75 billion in 2006, the highest level in five years, according to a survey released on Monday by market research firm VentureOne.

Funding for biotechnology and medical devices, Internet services and alternative energy start-ups fueled the industry's growth, according to a year-end summary from Ernst & Young LLP and Dow Jones VentureOne.

Health care venture investments attracted 628 deals as financing levels grew 12 percent to $8.25 billion.

"Health care, really for the past couple of years, has been generating most of the growth that we are seeing," said Josh Grove, an analyst with venture capital market research firm Dow Jones VentureOne.

Investment in medical devices saw a record year, both in the number of deals and dollars invested, which grew 20 percent to $2.63 billion. Biotech and pharmaceutical firms lured nearly twice as much capital, growing 12.5 percent to $4.72 billion.

"Medical devices in the past was the poor stepchild to biotech," said Mike Carusi, a health care investor and partner at Advanced Technology Ventures (ATV) in Palo Alto, California. "No longer, judged in terms of exits through IPOs and mergers over the past 12-24 months," he said.

Six of the 10 largest fourth-quarter deals were in health care, while the next generation of Web companies, known was "Web 2.0," drew a major chunk of smaller, early-stage fundings.

Overall investments in information technology, which attracted more than half of all U.S. venture investments in 2006, grew only 2.3 percent in to $13.76 billion.

This reflects a still weak U.S. market for initial public offerings, which the venture industry has traditionally counted on for its out-sized gains. "There's more of drive to make companies a viable acquisition target," Grove said.

Funding for "information services," including Web start-ups, surged 27.5 percent over 2005, while computers and software firm rose more modestly. By contrast, annual financing of telecoms and semiconductor companies declined versus 2005.

"With IT (information technology), it is tough to find that next area of growth," ATV's Carusi said, noting that both software and communications investing is challenging.

"That's why you also have folks exploring other areas of growth like 'clean tech,' China and India," he said.

Alternative energy investments, which account for the bulk of what promoters call "clean technology," was $537.6 million, nearly triple 2005's levels. Total "clean tech" funding could reach near $1 billion when final figures are in, Grove said.

Meanwhile, investments in business, consumer and retail services rose a healthy 12 percent to $2.63 billion, but are now a small piece of the overall U.S. venture funding pie.

Such investments are one-tenth of their level in 2000, partly reflecting a shift in spending on business services start-ups from inside the United States to China and India, Grove said. Web self-service and e-commerce companies have also sapped demand for more conventional business service firms.