Venture capitalists invested $7.1 billion in U.S. companies in the first three months of the year, lifting the industry to its biggest quarter in more than five years, according to figures to be released Tuesday.
The amount spread across 778 deals represented the most biggest quarter for venture capital since the final three months of 2001, based on data compiled by PricewaterhouseCoopers, Thomson Financial and the National Venture Capital Association.
The first-quarter flurry represented an 11 percent increase from the $6.3 billion invested by venture capitalists in last year's first quarter.
The fast start indicates “this will be a breakout year for U.S. venture capital,” said Darrell Pinto, Thomson Financial’s director of global private equity performance.
After the dot-com bust lumped them with huge losses in 2001 and 2002, venture capitalists hunkered down for several years while they weeded through their investment portfolios.
VC investors remained circumspect in the past two years, partly because a lackluster market for initial public offerings of stock provided them with little incentive to ramp up their investments. IPOs are one of the primary ways that venture capitalists reap profits from their investments.
With the IPO market picking up again, venture capitalists appear to be more willing to take risks in pursuit of a big payoff on Wall Street.
A total of 53 IPOs were completed during the first quarter, up from 43 at the same time last year, according to Renaissance Capital’s IPOhome.com. Those first-quarter IPOs raised $9.8 billion, a 10 percent increase from last year.
The stock market’s strong performance over the past year also is fueling more acquisitions by publicly held companies that are using their shares to finance buyouts of smaller startups with promising technology or products.
Last year, the average price paid for a startup funded by venture capitalists rose 19 percent to $114 million — the highest price tag since the dot-com frenzy of 2000. In this year’s first quarter, the average acquisition price of venture-backed startups climbed to $161 million.
The run-up is deluding some entrepreneurs into thinking their startups are worth more than they really are, said Ullas Naik, a managing director with Globespan Capital Partners in Palo Alto. Naik said his firm walked away from a couple deals in the first quarter because the price was too high.
Biotechnology and the Internet were among the biggest financial magnets during the first quarter.
Venture capitalists invested $1.49 billion in biotech firms, more than other sector. Internet startups collected $1.3 billion from venture capitalists, lured by the growth of online video, gaming and social networking. Specialty search engines trying to focus on a specific niche are also drawing a lot of interest, Naik said.
The amount of venture capital committed to the Internet during the first quarter represented the most since the dot-com bust.
The high cost of oil and concerns about global warning are fueling more investments in alternative energy or “clean tech.” Venture capitalists invested $264 million in 23 clean tech deals in the first quarter.
Despite the first-quarter surge, venture capital investments still remain well below the levels reached during the dot-com heyday. In 2000, venture capitalists invested an average of $26 billion per quarter.