Increased U.S. Venture-Capital Investing in Fourth Quarter Drives Annual Total to Highest Level in Four Years.

SAN FRANCISCO & NEW YORK -- Ernst & Young LLP/VentureOne Quarterly Venture Capital Report Finds Early-Stage Activity Represented 38% of Deals in the Fourth Quarter

U.S. venture-capital investing in 2005 rose to its highest level since 2001, with $22.13 billion invested in 2,239 deals. This represents a 2% increase over 2004 in capital invested, while deal-flow was flat, according to the Quarterly Venture Capital Report released by Ernst & Young LLP and VentureOne, a unit of Dow Jones Newswires and the publisher of VentureSource.

The positive outcome was partly a result of increased deal-flow in the fourth quarter. There were 588 deals in the fourth quarter--the most in a single quarter this year--and seven more than occurred in the same quarter a year ago. The capital invested in the fourth quarter--$5.31 billion--was up 3% from the $5.18 billion invested in the fourth quarter of 2004.

Among the noteworthy trends in 2005 was an increase in financing for medical-devices companies, which garnered more than $2 billion in capital this year--the most directed at this segment since 2000. This likely was fueled by the positive initial public offering environment for medical-devices companies during the past two years. In addition, $2.42 billion was invested in consumer and business-service companies, which includes a number of Internet companies. This is the most money to this segment since 2001--and a 53% increase over 2004--signaling interest in Web 2.0 and other services.

"Investors clearly showed diversity in their portfolios in 2005. While information technology continued to receive the lion's share of investment at just under $12 billion, companies focused on health care, business, consumer and financial services, and alternative energy; advanced materials also gained in favor," said Stephen Harmston, director of global research for VentureOne. "Overall, the year's positive outcome--coupled with a dynamic acquisition market for venture-backed companies of late--indicates that venture-capital investors remain committed to funding entrepreneurial innovation in all its forms."

For example, while alternative energy and the entire energy segment remain only a small portion of total venture-capital investing, environmental and regulatory changes appear to be fueling new interest here as deals nearly doubled to 24 in 2005 and capital invested increased 135% to $194.2 million.

The largest deal of the fourth quarter was a $171 million round of financing for Health Dialog of Boston, a provider of care-management services. The largest deal of the year was the $320 million first round for Integro of New York, an insurance-services provider.

Within the information-technology (IT) category, $11.97 billion was invested in 1,276 financings in 2005--a 4% decrease in capital and an 8% decrease in deal-flow. Within the category, the communications segment was responsible for 223 deals and $2.96 billion in investment--two fewer deals but 5% more capital. The capital invested in the information-services segment increased as well, to $1.11 billion--the most capital invested in this segment in four years. On a quarterly basis, only the semiconductor segment posted an increase in the fourth quarter with $437.9 million, which is 25% more than was invested in the fourth quarter of 2004, while the deal count held steady at 37.

The fourth quarter also saw a significant uptick in early-stage deals, which represented 38% of the quarter's financing rounds--the largest percentage since the first quarter of 2001. For the full year, early-stage deals represented 35% of all rounds, up from 34% in 2004.

"The strong fund-raising environment in 2004 and 2005, along with the renewed ability for venture-backed companies to find an exit, has opened up the opportunity for investors to increase their financings of seed- and first-round deals, promoting new growth in the health-care and IT industries," said Bryan Pearce, Ernst & Young venture capital advisory group leader. "In addition, the capital invested in seed- and first-round deals nationwide reached $4.75 billion--the most for this stage of financings since 2001."

He continued, "But investors also remain committed to supporting existing portfolio companies even as the time period from initial financing to liquidity exit has grown from about 2.5 years in 2000, to more than 5 years in 2005. This is evidenced by the $10.60 billion directed at later-stage financings this year, which is also the most in four years."

The median size of a round of financing in 2005 was $6.6 million, down from $7 million in 2004. However, health-care median-round sizes rose to $8 million, up from $7.5 million in the preceding year. IT- and products-and-services-round sizes remained steady at $7 million and $5 million, respectively.

By region, the San Francisco Bay Area dominated the venture-capital investing landscape, with 731 deals and $7.69 billion invested--or 33% of all deals and 35% of the capital in 2005. New England was the second most active region with 272 deals and $2.83 billion, followed by Southern California with 203 deals and $2.09 billion invested, and the New York Metro area with 159 deals and $2.19 billion invested.

The investment figures included in this release are based on aggregate findings of VentureOne's proprietary U.S. research and are contained in VentureSource. This data was collected by surveying professional venture capital firms, through in-depth interviews with company CEOs and CFOs, and from secondary sources. These venture capital statistics are for equity investments into early-stage, innovative companies and do not include companies receiving funding solely from corporate, individual, and/or government investors. No statement herein is to be construed as a recommendation to buy or sell securities or to provide investment advice. Copyright (C) 2006, VentureOne.

About VentureOne

VentureOne (www.ventureone.com or www.venturecapital.dowjones.com), a unit of Dow Jones Newswires, has been the leading provider of finance and investment data to the venture capital industry for almost 20 years. VentureSource, a sophisticated electronic database on the venture capital industry, is published by VentureOne.

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