VC deals show sector confidence

Worries about the slumping U.S. housing arena and related turmoil in the credit market have been wreaking havoc on share prices across a broad swath of businesses, including IT vendors. But fresh venture capital data indicates that underlying confidence in IT remains strong.

The second quarter of 2007 saw the highest level of VC deals reported in a quarter since the third quarter of 2001 with the IT sector taking a lion's share of transactions, according to the MoneyTree Report released this week by PricewaterhouseCoopers and the National Venture Capital Association. The report was based on data from Thomson Financial.

In terms of overall dollar value of VC deals, the second quarter fell slightly from the first quarter of this year, though both quarters had total deal values higher than any quarter since 2001. Across all sectors, there was $7.4 billion put into 845 deals in the first quarter. There was $7.1 billion invested in 977 deals in the second quarter.

The value of VC deals in the IT sector went down as well, even though the total number of deals went up. But this is a good thing, venture capitalists say. It shows that, though 2007 could be the biggest year since 2001 in terms of both value and number of deals for IT, venture capitalists are taking a more measured approach than they did in the frenetic runup to the dot-com crash, according to industry insiders.

For example Internet-specific companies -- those whose business model depends on the Internet, regardless of what their primary business is -- received $897 million in the second quarter, down from the first quarter's $1.4 billion, according to the report.

The software sector had its strongest quarter since 2001 with $1.5 billion in deals, regaining its position as the single largest industry sector for the quarter. Other industry sectors experiencing both value and deal increases included networking and equipment, semiconductors, and computers and peripherals.

What's happening is that venture capitalists are seeing a lot of their investments mature with startups being snapped up by big companies, according to Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers.

This gives them the bandwidth to invest in startups. "The gating factor is not money, it's people -- you can sit on only so many boards," Lefteroff said.

Bellwether IT companies, including those in mature markets, have reported strong earnings recently and have pumped up mergers and acquisitions to keep momentum going, snapping up smaller companies to quickly get up to speed on new technology,

"Software is in the number one position, and within that, security still gets a fair amount of interest, but we have seen a resurgence of interest, believe it or not, even in enterprise software," Lefteroff said. "Enterprise software and applications is seen as a good place to get liquidity, selling to the likes of the Oracles and SAPs of the industry," Lefteroff said.

There is solid but measured interest in Internet companies, and though telecom companies have fallen in VC favor somewhat recently -- perhaps due to a cyclical trend -- networking has captured interest again, Lefteroff said. "People are seeing unused capacity being absorbed and are looking at network equipment getting back to business as usual," he said. Next-generation routers are of particular interest.

Strong corporate earnings, rising value of VC deals, increasing mergers and acquisitions activity, and better than expected PC sales this year are helping to bolster faith in IT even as macroeconomic concerns batter the stock exchanges.