VC Investments Up 5% in Q104

April 26, 2004 ( - Investment in U.S. venture-backed companies was up 5% during the first quarter to the highest dollar amount in almost two years while the number of transactions was down 15% over Q403.

According to the Quarterly Venture Capital Report released by Ernst & Young and VentureOne, VC investment totaled $5.1 billion in the January to March 2004 period while there were 465 VC deals during the period – down from 549 the quarter before. The decline is consistent with annual trends; the first quarter of the year is an administratively focused period for many venture capital firms.

The biopharmaceutical segment attracted its largest infusion of venture capital spending ever, with $1.5 billion invested in 57 deals, noted John Gabbert, Vice President of Worldwide Research for VentureOne. “The biopharmaceuticals segment is really the new bellwether for the VC industry as a whole. Half of the largest deals this quarter were for biopharmaceutical companies,” Gabbert said. “In fact, this segment attracted 29% of all investments this quarter, even though deals were slightly reduced from 4Q03. Still, the biopharmaceutical deal-flow is up 84% from a year ago.”

For the fourth consecutive quarter, the health-care sector gained momentum with 7% more dollars invested, bringing the total to $1.8 billion, thanks to the large biopharmaceutical financings. The largest deals this quarter included a $250-million second round in Jazz Pharmaceuticals of Palo Alto, California, which is commercializing pharmaceutical products in key therapeutic areas, and the $65 million later stage investment in AlgoRx Pharmaceuticals of Cranbury, New Jersey, a developer of pain relief therapeutics.

Companies within this segment have also found support in the public markets. Eight of the 10 venture-backed initial public offerings this quarter were biopharmaceutical companies, as were almost half of the 29 companies that filed registration papers for a public offering in the first quarter.

On the other hand, information technology activity held steady with 283 deals this quarter, only nine fewer deals than last quarter, while the amount invested in IT rose 4% to $2.6 billion. IT deal flow accounted for 61% of financing rounds, up from just 53% of all deals last quarter.

Early-stage investments, with 30% of the deal flow, remained relatively unchanged compared to previous quarters. The dollars devoted to these rounds grew slightly to $938 million. By development stage, the number of financing rounds by profitable companies remained the same, while deal activity in all other development stages declined, suggesting that more mature companies are still attractive to investors.

The Bay Area of California was the most active VC region, followed by New England, which is a hub for biopharmaceutical companies.