Software Surge Drives Up U.S. Venture Activity—and Top 10 Deals

Xconomy National — 

Overall venture capital activity turned up sharply during the three months that ended June 30, with venture firms investing just over $7 billion in 898 deals throughout the United States, according to the latest MoneyTree survey.

The study generally confirms the improving trend in VC activity that was highlighted in the quick take from CB Insights, which we covered earlier this week.

But where CB Insights saw the highest totals in a decade, the MoneyTree Report suggests the engine driving the innovation economy doesn’t have as much horsepower as it has in the past. While software startups attracted more capital than any other sector during the quarter, venture activity in the life sciences sector plunged in both dollars and deals.

The MoneyTree Report, which provides a detailed assessment of quarterly VC activity, is compiled by Pricewaterhouse Coopers and the National Venture Capital Association (NVCA), using data from by Thomson Reuters.

After lagging behind life sciences investments for many years, “It’s exciting to see software take the lead for VC investments in the second quarter,” says Adam Marcus, a partner with Boston-based OpenView Ventures. The $2.3 billion that VCs invested in 290 software deals during the quarter was the biggest amount since the second quarter of 2001, when VC investments in software deals totaled more than $3 billion nationwide. Software deal activity was closer to par—the previous high was 296 deals in the third quarter of 2011.

Internet-specific startups attracted $1.8 billion in 261 deals, marking the second-highest level of Web investments in more than a decade. The top 10 deals for the quarter included two Internet-specific investments (see list below).

Overall, the $7 billion and 898 deals that the MoneyTree report counted in the second quarter represents a 17 percent gain in terms of dollars, and an 11 percent increase in deal count, compared with MoneyTree’s data from the first quarter of 2012, when $6 billion went into 809 deals. But it amounted to a 12 percent decline in  capital and a 15 percent drop in deals compared with the second quarter of 2011, when VCs invested $8 billion in 1,057 deals.

“I think the larger story is that overall activity is still tracking at a slower pace than last year nationally,” says John Taylor, the NVCA’s vice president of research. With just over $13 billion invested nationwide so far this year, he estimates venture investments will total about $26 billion by the end of the year. That compares to more than $29.5 billion in 2011 and $23.4 billion in 2010.

Taylor says he’s heartened, though, that nearly 53 percent of the deals during the quarter were seed or early stage investments. “That’s the second-highest level since 1995, when the NVCA started collecting the data,” he says.

In the life sciences (biotechnology and medical devices), venture investing declined for the second consecutive quarter, with nearly $1.4 billion invested in a total of 174 startups. It was a nearly 40 percent drop in dollars and a 22 percent slide in deals from the $2.3 billion that VCs invested in 223 deals during the same quarter of 2011. In the biotech sector alone, the MoneyTree Report said $697 million was invested in 90 deals, the lowest quarter total since the first quarter of 2003, when VCs invested $647 million in 68 biotech startups.

“The numbers for the first and second quarters of 2012 are pretty bad,” says Jimmy Rosen of Intersouth Partners, a Durham, N.C. venture firm that invests in mostly seed and early stage startups in the life sciences, including animal health, agricultural, and medical technologies.

Looking just at seed and early stage startups in the life sciences sector, Rosen says the second-quarter results are consistent with the average over the past decade. “The numbers are not as strong as we’d like them to be,” Rosen says, but “as far as trends or outlier data, I certainly would not regard anything that’s happened in the first two quarters of 2012 as an outlier.”

The top 10 deals of the quarter were:

Fisker Automotive, Anaheim, CA; $147.6 million.

Harvest Power, Waltham, MA; $112 million.

Bloom Energy, Sunnyvale, CA, $100 million.

Pinterest, Palo Alto, CA, $100 million.

Castlight Health, San Francisco, CA, $100 million.

Skybox Imaging, Mountain View, $70.2 million.

Qualtrics Labs, Provo, UT, $70 million.

Quora, Palo Alto, CA; $60 million.

SunRun, San Francisco, CA; $60 million.

Palantir Technologies, Palo Alto, CA; $56 million.