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After three lean years, funding for start-ups rises

By D.C. Denison
Globe Staff / January 21, 2011

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Investments by venture capitalists in start-up and growth companies rose sharply last year, both in New England and across the nation, the first such annual increase since 2007.

Nationally, $21.8 billion was invested in 3,277 deals in 2010, an increase of 19 percent in dollars and a 12 percent rise in the number of deals over the prior year, according to the MoneyTree Report released today by PricewaterhouseCoopers and the National Venture Capital Association.

Investments in New England companies were up 14 percent from 2009 to slightly more than $2.5 billion in 2010.

That venture capitalists are investing more money and making more deals is “a significant vote of confidence,’’ said Michael A. Greeley, general partner at Flybridge Capital Partners in Boston and chairman of the New England Venture Capital Association. “It shows that people are feeling better about the economy, since a venture investment is a commitment for seven or eight years.’’

More money went to software companies than any other sector last year, with $4 billion — a 20 percent increase over 2009 — being invested in 835 deals. But the most dramatic rise in investments was in the clean energy sector, with $3.7 billion invested last year, 76 percent more than in 2009.

Mark Heesen, president of the National Venture Capital Association, said that last year’s increase in funding marks another stage of recovery from the economic meltdown of late 2008.

“The mood in the industry is that we’ve hit bottom and we’re working our way out,’’ he said. “It was very hard to be optimistic at this point last year, or the year before, but now things feel more stable. And venture capitalists love stability.’’

Nationally, the largest funding deal of the last quarter in 2010 was the short-message social network Twitter Inc., which received a $200 million investment from the West Coast venture firm Kleiner Perkins Caufield & Byers and an undisclosed second firm. Five energy firms were also among the top ten funded companies last quarter, leading Heesen to observe that there was enough momentum in the two sectors — social networking and energy — that they “could be considered frothy,’’ although he did not think there was any danger of a bubble.

“If there’s no frothiness, there’s no excitement in the industry,’’ he said. “Besides, the venture capital industry is now much smaller than it was during the dot-com boom, so there’s little chance of a cataclysmic bust.’’

Two related sectors that shrunk during the last quarter of 2010 were biotechnology and medical devices.

Nationally, biotechnology venture investments dropped in the fourth quarter, with $685 million going into 94 deals, a 24 percent decline in dollars and a 15 percent slump in the number of deals. During that same period, medical devices dropped 31 percent in dollars and 15 percent in deals from the previous quarter, with $400 million going into 71 deals.

Greeley said the national decline in life sciences deals was probably related to “uncertainty over health care reform.’’

In New England, however, six of the top 10 deals of the last quarter were in life sciences, led by NinePoint Medical Inc. of Cambridge, which raised $27.8 million to help it develop technologies to help streamline patient care. The remainder of New England’s top deals were in sectors as diverse as e-commerce, chemicals and materials, and alternative energy.

Kevin Shaw, head of the PricewaterhouseCoopers’ emerging company services practice in Boston, said he was encouraged by the overall level of activity in New England, which after a few stagnant, lackluster years posted solid gains in both dollars invested and number of deals.

“Investment in New England companies is steady and growing,’’ he said. “The train is moving.’’

D.C. Denison can be reached at denison@globe.com.