Venture investing at highest since '01

Fueled by a surge in biotechnology funding, first-quarter venture capital investing climbed to its highest level nationally since the last three months of 2001, according to the quarterly MoneyTree report set to be released today.

Total outlays of $7.1 billion in this year's January-to-March period propelled venture investments out of the $4.3 billion to $6.9 billion quarterly range in which they'd hovered for over five years.

"The breakout bodes well for the rest of 2007," said Darrell Pinto , director of global private equity performance for the Thomson Financial research firm. It sponsors the MoneyTree report, based on a comprehensive industry survey, with the PricewaterhouseCoopers accounting firm and the National Venture Capital Association.

Nationally, first-quarter venture capital outlays rose 13.5 percent from the $6.2 billion invested in the fourth quarter of 2006 and 11.4 percent from the $6.3 billion in last year's first quarter.

Start-ups in New England, the second-largest regional venture capital magnet after Silicon Valley, raised $975.5 million in the first three months of 2007. That was up 29.1 percent from the $755.4 million raised by New England companies in the fourth quarter of 2006 and 2.5 percent from the $951.5 million raised in last year's first quarter.

Though there were more dollars invested, the number of deals across the country fell to 778 in the three months ended March 31, from 884 in the fourth quarter of 2006 and 853 in the first quarter of last year. In New England, the number of deals tumbled to 95 in the first quarter from 107 in the previous period and 114 in last year's first quarter.

That meant the average US deal size increased to $9.1 million in the most recent quarter, from $6.2 million in the previous quarter and $6.3 million a year ago. One reason was a growing focus on later-stage companies, which typically require a greater infusion of cash before they are acquired or go public in initial public offerings. "VCs are preparing their companies for exit opportunities," Pinto said.

While seed and early-stage funding declined, later-stage investments totaled $3 billion in the first quarter, 57 percent higher than last year's fourth quarter and 12 percent higher than last year's first quarter. The two top investment areas were information technology, which drew $2.8 billion, and life sciences, which drew $2.5 billion.

Within those areas, the sector attracting the most venture capital was biotechnology with nearly $1.5 billion, followed by software with $1.1 billion and medical devices with over $1 billion. "The life sciences are coming on," said John S. Taylor , vice president of research at the venture association.

Garheng Kong , general partner at Intersouth Partners, a Durham, N.C., venture firm specializing in life science investments, attributed the upswing in biotech and medical gear funding to "a significant dearth of pipelines in large pharmaceutical companies."

Many pharmaceutical and medical equipment giants, facing difficulty in medical trials and financial pressure to bring new products to market, are turning to venture-backed startups for innovation, Kong said. "Pharmaceutical companies have said, 'We positively will buy companies, we have the need,' " he suggested.

Other factors cited by Kong are an increasing number of new drugs and treatments geared to relatively small groups of people with rare diseases or disorders and a boost in demand for procedures like hip replacements as the population ages. "There is a lot of interest in lifestyle drugs," he said. "It's no longer acceptable to just get older."

Other venture firms are funding entrepreneurial activity in the expanding fields of Internet-specific technologies and clean energy. These include everything from online games and social networking to biofuels and clean coal, said Ullas Naik , managing director of Globespan Capital Partners in Palo Alto, Calif.

Naik said software companies creating virtual digital worlds, like Second Life, and new consumer applications for cell phones, such as wireless search, are raising more venture rounds.

Robert Weisman can be reached at weisman@globe.com.