Investments End Year on High Note, Fund-Raising Gains Momentum –

Venture capitalists played Santa Claus in the fourth quarter, stuffing a lot more money into startups’ stockings than anyone anticipated.

They pumped $4.92 billion into 679 U.S.-based companies in Q4, an 11% increase over the $4.43 billion they invested in Q3. It was also the most money disbursed in a three-month period since the second quarter of 2002.

Tracy Lefteroff, venture capital chief for PricewaterhouseCoopers (PwC), had said that he anticipated between $16 billion and $17 billion would be disbursed in 2003. In other words, the market was set to experience a second straight quarter of decline after a slight Q2 rebound.

Lefteroff, however, was either trying to downplay expectations or is just too conservative a fellow. It turned out that VCs invested more than $18 billion for the year, according to figures compiled by PwC, Thomson Venture Economics and the National Venture Capital Association.

The Q4 bump seems to indicate that the venture capital market has finally hit rock bottom and begun to reemerge.

Some investors suggested as much following the release of Q2 data, but those optimists were quieted down some when the Q3 data dipped back down.

What many failed to realize, however, is that the third quarter is a traditional downer month, with disbursement gains recognized only twice since 1990.

Not only was the overall disbursement total up in Q4, but also so were average investment sizes and average pre-money valuations for seed and early-stage companies.

The average Q4 deal size was $7.25 million, which is the highest since a $7.26 million mark in Q2 2002.

Seed and early-stage pre-money valuations, meanwhile, continued a six-quarter ascent to wind up at an average of $8.25 million per company.

“The fourth quarter increase is probably the result of the overall optimistic feeling that the capital markets have benefited from in the last half of 2004,” says Jesse Reyes, vice president of product management with Thomson Venture Economics.

“The mini-boom in the public technology arena may feel oh, so like 1999,'” Reyes says, “but it has fueled a feeling among VCs that increased tech investing and spending has been validated. Even though these investments won’t be exited for several years, the investment has to be taken in the context of public technology exuberance – whether rational or irrational.”

He adds that this may be a positive excuse rather than a legitimate reason for increased investment activity. But if this keeps up, the deals will only be more expensive tomorrow.

Reyes’ citation of technology investment is important, because it underscores the fact that IT still was king in 2003.

More than 63% of all 2003 VC disbursements went into IT companies, with 27.72% going to life sciences companies. Broken down a bit further, the software sector narrowly edged out the medical/health care sector for the top industrial niche, with 706 software companies raising $3.57 billion compared to the $3.10 billion raised by 334 medical/healthcare companies.

The year’s largest VC deal came from Reliant Pharmaceuticals Inc., which secured $252 million in Series D funding. The Liberty Corner, N.J.-based drug marketing company raised its windfall over two tranches – one in Q3, the other in Q4 – at a final post-money valuation of about $844 million.

Investors included Bay City Capital, Invemed Associates, Goldman Sachs Capital Partners and the Pritzker family.

Other big winners included WildBlue Communications and Archipelago LLC, which raised $156 million and $125 million respectively.

The year’s most active VC firm was stalwart New Enterprise Associates (NEA), which invested in 73 different deals.

Draper Fisher Jurvetson was next with 52 investments and Sevin Rosen Funds placed a strong third with 50 investments.

Intel Capital ranked first as the firm that made the most new investments. In fact, the firm says it made more than 125 investments overall in 03, but it didn’t report all of them to Thomson Venture Economics for competitive reasons.