Venture capitalists reverse funding decline as prospects improve

US venture capitalists reversed a three-year downward trend by investing $20.9 billion into 2876 deals in 2004, according to the annual MoneyTree Survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association.

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Venture capitalists reverse funding decline as prospects improve

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The annual investment level fell every year beginning in 2001, culminating in a six-year low of $18.9 billion in 2003. The increase in 2004 was largely attributable to late stage investments jumping to $7.2 billion in 2004 compared to $4.9 billion in 2003.

Mark Heesen, president of the National Venture Capital Association, says: "The strengthening IPO and acquisitions markets clearly helped fuel late stage financings in 2004. Now, as venture capitalists are beginning to invest their new funds, we may well see a shift in focus back to early stage companies in the coming year."

Late stage financing is generally done in contemplation of an upcoming sale or IPO, suggesting a continued strengthening of the exit opportunities in 2005.

While life sciences continue to dominate the field, capturing 27% of all venture capital dollars, funding for the software industry hit a three-year high with $5.1 billion. In terms of number of deals, software was far and away the leader with 862 fundings, or 30% of all venture capital deals for the year.

Much of the investment represents a renewed enthsiasm for Internet-related opportunities, with a third of all funding directed at dot.com companies. Options Express, the online options trading company was among the top three companies for VC investments last year, scooping $88 million in financing.

Looking ahead to 2005, the survey suggests continuing support for companies seeking late-stage financing and a growing investor appetite for start-up financing. Expansion funding is likely to remain flat.

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