Analysis: Global VC Investment On The Rise, ‘CleanTech’ All The Rage

Dec 15 2006 | 3:06pm ET

The international venture capital community, which has invested $25.39 billion after the first three quarters of the year, is poised to hit a five-year high, according to a global year-end analysis by Dow Jones VentureOne and Ernst & Young.

Investment is expected to top $32 billion after the fourth quarter, though that is still down from 2001 when international vc investment reached $51.22 billion.

According to the report, despite besting last years dollar amount, global deal flow remains constrained and is expected to fall slightly short of the 3,931 deals completed in 2005.

An International Affair

The joint analysis points to strong merger and acquisition activity for venture-backed companies in the United States and Israel, both having posted 311 and 312 venture-backed M&As at the third quarter, respectively. The median amount being paid for those companies — $50 million in both the US and Israel — has topped 2005 amounts in both countries.

This year, the international vc community has also had a relatively steady stream venture-backed IPOs. Europe leads the pack in terms of volume with 56 IPOs, but the IPOs are much smaller than last year with only $1.22 billion raised so far, cumulatively. Whereas U.S. venture-backed IPOs have lagged in volume (37) relative to their European counterparts, they have raised $2.47 billion, putting them on path to exceed last year’s level.

"In India, venture capital investment activity has accelerated in the first three quarters of 2006 by both U.S. and local venture capital funds,” said Gil Forer, global director of Ernst & Young's Venture Capital Advisory Group, in a statement.  “We’ve seen as much as $178 million invested in 48 deals in India this year."

VC's ‘CleanTech’ Craze

In 2006, venture capital investors showed a real appetite for clean technology companies, which, as defined by VentureOne and Ernst & Young analysis, are “companies that directly enable the efficient use of natural resources and reduces the ecological impact of production.” Areas of focus for the analysis include energy, water, agriculture, transportation, and manufacturing.

In the United States, $585.6 million has been invested in 60 companies focused on the area so far this year, already 30% more than was invested in all of 2005, according to the analysis. Investors are also seeing strong potential, ramping up the size of deals to support these companies. The median investment so far this year in the U.S. is $7.5 million, compared to $4.5 million last year for clean tech companies.

European investment in clean tech concerns is already 26% higher than was invested in all of 2005, at $102.4 million. Even China venture capital investment is following this trend, with nine deals and $74 million invested year-to-date. China is posting significantly larger deals in the space with a median size of $6.3million, up from $1.3 million last year.

Along with strong growth, the venture capital market has shown considerable interest in new markets such as China, where deal flow is poised to reach an all-time high, and in emerging industries including the burgeoning "cleantech" segment and Web 2.0. For example, a separate analysis prepared by VentureOne and Ernst & Young has found that $761.4 million has been invested in clean technology on a worldwide basis so far this year, up 50% from $504.1 million invested after the first three quarters of 2005.

Going forward, the analysis says the improving liquidity landscape is likely to continue on a global basis with Asia likely seeing even more strengthening of new venture capital markets along with additional investment focused on emerging areas of the Internet and the environment.

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