SAN FRANCISCO, March 18 /PRNewswire-FirstCall/ -- The Web 2.0 investment boom may be peaking. That is according to new data announced today by Dow Jones VentureSource at the Web Ventures conference in Redwood City, Calif., that shows venture capitalists pumped a record $1.34 billion into 178 Web 2.0 deals in the U.S. in 2007, up nearly 88% over amounts invested in 2006. However, one company-social network Facebook, which raised at least $300 million -- accounted for 22% of all funding that went into this sector in 2007.
SAN FRANCISCO, March 18 /PRNewswire-FirstCall/ — The Web 2.0 investment boom may be peaking. That is according to new data announced today by Dow Jones VentureSource at the Web Ventures conference in Redwood City, Calif., that shows venture capitalists pumped a record $1.34 billion into 178 Web 2.0 deals in the U.S. in 2007, up nearly 88% over amounts invested in 2006. However, one company-social network Facebook, which raised at least $300 million — accounted for 22% of all funding that went into this sector in 2007.
The data also reveals slowing deal growth. From 2002 to 2006, Web 2.0 deal flow doubled every year, but 2007 only saw deals increase 25% to 178 from 143 deals in 2006. Nearly all of this growth happened outside the San Francisco Bay area, the longtime home of Web-related innovation and investment.
"On the surface, the numbers look fine for the Bay Area-$720 million invested in 72 deals — but take Facebook's $300 million out of the statistics and you see a very different picture," said Jessica Canning, Director of Global Research for Dow Jones VentureSource. "Web 2.0 deals in the Bay Area actually dropped from 74 deals in 2006 to 69 last year and investments were down 3% from the $431 million invested in 2006. It's clear that the real growth in the Web 2.0 sector is happening outside of the Bay Area."
U.S. Web 2.0 Investment by Region, 2006-2007 2006 2007 Deals Investment Deals Investment (MM) (MM) Bay Area 74 $431 72* $721* New England 15 $79 20 $158 Southern California 10 $41 14 $115 New York Metro 9 $18 25 $58 Pacific Northwest 6 $35 13 $140 Southeast 6 $24 7 $47 Mountain (CO, AZ, UT) 4 $7 7 $31 Texas 3 $10 2 $4 North Carolina 2 $3 2 $10 *Includes Facebook
Facebook, based in Palo Alto, Calif., raised $240 million from Microsoft in a highly publicized corporate round as well as at least $60 million more from individual investors last year. The next-largest Web 2.0 deal was the $44 million first round for Ning, also of Palo Alto, which lets users create their own niche social networks.
Deals Sizes Stay Relatively Small But Valuations Jump
Despite these larger deals, Web 2.0 companies still remained a relatively inexpensive investment for venture capitalists. According to the data, the median deal size for these companies reached a record $5 million in 2007, up from $4.1 million in 2006. This is still far behind the overall $7.6 million industry median for a venture capital deal in the U.S. in 2007.
"The beauty of Web 2.0 companies is that they can do so much with so little. A few million dollars and they're not only up and running but attracting eyeballs and advertisers," added Ms. Canning. "But 2008 may be a make-or-break year for many Internet companies with business models relying on advertising. The slumping economy, coupled with a slowdown in click-through rates for online advertising, is going to pose a real challenge to their ability to generate revenues and position themselves for an exit."
Even so, investors are placing a higher value on Web 2.0 companies. The data shows that in 2007, the median pre-money valuation for a Web 2.0 company reached a new high of $10 million, up from $6 million in 2006. Still, that's well below the overall $16 million median pre-money valuation seen for venture-backed companies in 2007.
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Note to editors: VentureSource has adopted a strict methodology for categorizing Web 2.0 companies, reviewing them on a case-by-case basis to determine if they meet specific criteria. Companies included in this study have a business model that revolves around a dynamic interface facilitating participation through such methods as user-created content, networking, and collaboration. Applications include podcasting, tagging, blogs, social networking, mashups, and wikis. Technologies used in these applications include: AJAX, RSS, SOA, CSS, XHTML, Atom, and rich Internet applications.
The investment figures included in this release are based on aggregate findings of VentureSource's proprietary research. 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.
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