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Software companies attract largest share of venture capital funding in 2012

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Venture capital funding of startups and growing companies are setting new records so far this year, and software and technology-related companies were the main beneficiaries.

Venture capital funding of startups and growing companies are setting new records so far this year, and software and technology-related companies are the main beneficiaries.

That's the word from the latest MoneyTree Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters. In total, venture capitalists invested $7.0 billion in 898 deals in the second quarter of 2012. This was a 17 percent increase in terms of dollars and 11 percent in the number of deals compared to the first quarter of 2012 when $6.0 billion was invested in 809 deals, the report states.

The software industry received the highest level of funding for all industries, the report states, with $2.3 billion invested during the second quarter of 2012 -- the highest investment total for the sector since the second quarter of 2001.  This level of investment represents a 38 percent increase in dollars, compared to $1.7 billion invested in the first quarter.  The software industry also had the most deals completed in Q2 with 290 rounds, which represents a 16 percent increase from the 251 rounds completed in the first quarter of 2012.

Internet-specific companies received the second highest level of investment in more than a decade with $1.8 billion going into 261 deals, a 22 percent increase in dollars and a 31 percent increase in deals from the first quarter, when $1.5 billion went into 199 deals. The MoneyTree analysis puts investment in Internet companies as surpassing the $1 billion dollar mark each quarter for the past two years, and two of the top 10 deals for the quarter were in the Internet-specific category.  "Internet-specific" is a discrete classification assigned to a company with a business model that is fundamentally dependent on the Internet, regardless of the company’s primary industry category.

“Software and Internet companies continue to be attractive industries for VCs since most of these companies tend to be capital efficient and don’t require large amounts of capital to operate," says Tracy Lefteroff, global managing partner of the venture capital practice at PwC US.

The clean technology sector, which crosses traditional MoneyTree industries and comprises alternative energy, pollution and recycling, power supplies and conservation, also saw an 8 percent increase in dollars but experienced a 28 percent decrease in deal volume, with $1.0 billion going into 55 deals during the second quarter -- compared to $962 million going into 76 deals in the prior quarter.

Life sciences investing declined for the fourth consecutive quarter, most notably in the biotechnology sector where $697 million went into 90 deals, representing the lowest quarterly total for the industry since the first quarter of 2003.

Overall, while 2012 funding levels may not match those of last year, it's still shaping up to be a busy year for venture capital. “If funding levels in the second half of the year remain consistent with the first half of the year, VC investing in 2012 will fall short of the nearly $30 billion invested in 2011 but will exceed the $23 billion invested in 2010,” Lefteroff says.

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Joe McKendrick

Contributing Editor

Joe McKendrick is an independent analyst who tracks the impact of information technology on management and markets. He is a co-author of the SOA Manifesto and has written for Forbes, ZDNet and Database Trends & Applications. He holds a degree from Temple University. He is based in Pennsylvania. Follow him on Twitter. Disclosure