VC Investments Hit 6-Year High

(Associated Press) Venture capital investments in U.S. startups climbed to a six-year high of $29.4 billion in 2007, raising hope that ample money will still be available to back promising new ideas even if the staggering economy falls into a recession.

The amount of venture capital spread across 3,813 deals represents the industry's busiest year since $40.6 billion went into nearly 4,500 U.S. startups in 2001, according to data scheduled for release Saturday by Thomson Financial, PricewaterhouseCoopers and the National Venture Capital Association.

The $29.4 billion invested last year marked an 11 percent increase from $26.6 billion in 2006.

In 2001, venture capitalists were actually curtailing their investments after the dot-com economy pushed the U.S. economy into its last recession.

Although many experts believe another recession is imminent, venture capitalists say there is little reason to believe their investment pace will slacken this year.

In a show of confidence, venture capitalists raised $34.7 billion for future investments during 2007, a 9 percent increase from the previous year.

The industry's optimism stems from a belief that many of today's hottest concepts either are recession-resistant or are developing moneysaving products that may have even more appeal during an economic downturn.

The investment areas spurring the optimistic outlook include: health care and biotech; the Internet; and technology aimed at developing alternative energy, reducing pollution and promoting conservation.

Combined, these sectors attracted nearly $16 billion in venture capital investments last year, accounting more than half of the total activity.

While focusing on specialties less susceptible to economic downturns, venture capitalists have been increasing their investments more gradually in recent years. During the dot-com boom, high-tech financiers had routinely entrusted millions of dollars with young Internet entrepreneurs who had never before run profitable businesses.

The newer, more disciplined approach makes it less likely there will be a dramatic about-face like the one that occurred after venture capitalists invested nearly $160 billion in 1999 and 2000. After that flurry, venture capital investments fell for the next three years before bottoming out at $19.7 billion in 2003.

“There is nothing to suggest we will fall off a cliff” this year, said P. Sherrill Neff, founding partner of Quaker BioVentures in Philadelphia.

Quaker BioVentures focuses on startups involved in pharmaceuticals, biotechnology and medical devices _ categories that Neff expects to remain in strong demand even in a feeble economy because people won't stop getting sick or growing older.

Other venture capitalists seem to share his opinion, helping to produce a record year for investments in “life sciences,” which includes biotech and medical devices. Venture capitalists invested $9.11 billion in 862 life sciences deals last year, a 21 percent increase from $7.56 billion in 2006.

Internet startups also appear better positioned to weather any economic turbulence because the advertisers that generate most online profits appear likely to keep shifting their spending from television, print and radio to the Web even if there is a recession.

Venture capitalists invested $4.6 billion in Internet deals last year, a 12 percent increase from $4.1 billion in 2006.

Venture capital investments in so-called “clean technology” focused on alternative energy and reducing pollution from fossil fuels totaled $2.2 billion, a 47 percent increase from $1.5 billion in 2006.

Although they are expected to continue to ramp up their investment this year, venture capitalists may have more trouble cashing out. That's because the sluggish economy could hinder initial public offerings of stock; last year 86 venture-backed startups made their market debuts, the most since 2004.

“We are very concerned about the public markets shutting down, but it is to be expected in times of unpleasantness,” said Deepak Kamra, general partner with Canaan Partners in Menlo Park.