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Second-Quarter VC Activity: Wish They All Could Be California Deals

Xconomy National — 

Venture capital activity that surged during the first three months of 2011 continued to rise through the second quarter, as funding for Internet startups soared by 69 percent over the same quarter last year, according to CB Insights, a New York information and data services firm.

In its quarterly venture capital activity report, CB Insights says U.S. venture firms invested $7.6 billion in 768 startups throughout the country during the second quarter ending June 30. It was a nine-quarter high point for both dollars and deals, and represented a 54 percent increase (from $5.9 billion) in capital, and a 25 percent gain in deals (from 612), compared with the same quarter in 2010. VC activity during the quarter even showed a slight increase over the first quarter of 2011, which recalled a pre-recessionary era as VCs pumped $7.5 billion into 738 startups nationwide.

If the current pace of venture funding continues, the U.S. could reach between $29 billion and $30 billion in total capital invested this year. “Of course, some of the punditry have suggested that the VC asset class’ ‘right size’ is around $25 billion,” the report says, “so it will be interesting to see if the momentum of Q1 and Q2 continues or if we’re in for a second half swoon.”

I’m expecting to get a more-detailed regional breakdown on venture activity next week, when the rival MoneyTree and Dow Jones VentureSource surveys will help triangulate VC trends. In the meantime, here are some highlights of the nationwide data being released today by CB Insights:

—Internet startups represented the busiest sector of venture activity during the second quarter, with VCs investing $2.74 billion (or 36 percent of all dollars) in 298 startups (39 percent of all deals). The capital flowing to Internet deals marked a 69 percent jump over the second quarter of 2010, when VCs invested nearly $1.62 billion in 233 Web startups.

—By almost every measure, VC activity in cleantech declined during the second quarter. The $781 million invested was a 25 percent drop from the $1.046 billion invested during the same quarter of 2010, but the 65 cleantech deals represented an 18 percent increase over the 55 deals from the same quarter last year. Cleantech also fell sharply compared with the previous quarter, which was a high water mark with more than $1.9 billion going into 86 deals.

—Healthcare investments showed new signs of life, with $1.9 billion invested in 147 startups during the second quarter. That’s the most capital to be invested in healthcare for at least a year. During the same quarter in 2010, VCs invested over $1.6 billion in 138 healthcare deals. In the first quarter of 2011, VCs invested almost $1.6 million in 150 deals.

—One of the most noticeable trends is a contraction of most venture activity into three states—California, Massachusetts, and New York—where the gravitational pull of innovation clusters and venture capital landed over 60 percent of the deals and more than 75 percent of the funding during the three months that ended June 30.

—California, as usual, accounted for the single biggest slice of venture capital funding, with nearly $3.66 billion (almost half of the nationwide total) invested in 336 deals. VC investments in Internet companies and healthcare together accounted for 58 percent of the state’s deals and 56 percent of the funding. The Golden State’s endless summer of venture activity apparently inspired the analysts at CB Insights to observe, “I wish they all could be California deals.”

—In Massachusetts, venture investors sank more than $1.1 billion in 89 deals statewide, marking a five-quarter high in both deals and dollars. In comparison to the same quarter in 2010, it was a nearly 66 percent gain in dollars (up from $689 million) and a 6 percent increase in deals (from 84).

—In New York, $539 million was invested in 61 deals. It was a nearly 52 percent rise in dollars (from $355 million) compared with the same quarter last year and a 27 percent increase in deals (from 48).

—The percentage of seed stage deals nationwide climbed to 12 percent, which was a five-quarter high for the earliest stage category of venture funding. The strengthening trend of seed stage deals remained steady across the Internet, healthcare, and cleantech sectors, but the overall amount of VC funding for early stage companies dipped to a five-quarter low, primarily due to a dearth of Series A deals.