‘Web 2.0’ Deals Spread Beyond San Francisco

By TY MCMAHAN

Venture-capital investment in so-called Web 2.0 companies, generally ad-supported Web sites in fields like social networking or blogging, is showing signs of maturity, with deals spreading outside the San Francisco Bay Area, according to new data released Monday.

The Bay Area, known for producing some of the most high-profile Internet companies, exploded last year with $413.7 million over 69 rounds of financing, which easily trumped any other region in the U.S. or overseas. However, in the first half of 2007, venture capitalists invested just $90.5 million in 25 rounds there, according to data from Dow Jones VentureOne and Ernst & Young LLP.

Meanwhile, New England topped the Bay Area in dollars with $102 million in the first half, over 10 deals, compared with $62 million and 12 deals in all of 2006.

Overall, the research showed that investors directed $646.2 million into 101 deals world-wide in the first half of the year, a 6% increase in investments over the same period in 2006, amid a rising interest in Web 2.0 in Europe and Israel. U.S. investments were virtually unchanged from the first half of 2006 with 67 deals and $357 million invested.

The data show that $52 million was put to work in 20 European Web 2.0 deals in the first half, roughly double the deals and investments seen in the same period last year. Israeli Web 2.0 companies raised $15 million in five deals in the first half, up from two deals and $5 million invested in all of 2006.

Investment in Web 2.0 start-ups has skyrocketed in the past two years as inexpensive technology has made it easier for people to communicate through the Internet.

“If you’re a venture guy, there are few areas you can look now and find an equally attractive place to put your money,” said Scott Raney, partner at Redpoint Ventures, Menlo Park, Calif. “You can’t beat an investment of $5 million in a company that could get acquired for hundreds of millions.”

Mr. Raney said companies better understand how to monetize the Web and are moving on from building a Web property — like a social network that attracts a particular demographic — to building a Web business that knows how to deliver targeted advertising to that demographic.

Meanwhile, valuations for Web companies continue to rise, a worrisome factor for venture capitalists in a much-hyped market. Mr. Raney said investors are split on whether it is best to invest in an unproven company at a low valuation or invest a large chunk of money at a high valuation in a company that is already gaining traction.

Source: Wall Street Journal

 

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