Led By Software, VC Investing Hits Six-Year HighLed By Software, VC Investing Hits Six-Year High

U.S.-based venture capital firms invested $29.4 billion in 2007, the highest level of investment since 2001, according to a new report from PricewaterhouseCoopers and the National Venture Capital Association. The IT sector, led by software companies, was the biggest single area of funding. The fastest growing: clean tech.The data is evidence that both VCs and entrepreneurs are "bullish" in outlook, says Deepak Kamra, a general partner with VC firm Canaan Partners. The money went toward 3,813 deals, with $6.3 billion going into early-stage and startup companies, $10.8 billion into so-called expansion companies, and $12.2 billion into later-stage companies. The PwC/NVCA Money Tree Report is based on data from Thomson Financial.

Investments in tech companies totaled $14.3 billion. Here's how that breaks down: $5.3 billion in software; $2.1 billion, telecom; $1.9 billion media and entertainment; $1.8 billion, semiconductors; $1.3 billion, IT services; $1.3 billion, networking; and $655 million, electronics and instrumentation.

Software investment in 2007, while the largest category, was relatively flat compared to 2006. Software-as-a-service and open source companies were among those drawing the most funding. That said, many open-source startups are still struggling with how to make money at open source, says Kamra.

Internet companies received $4.6 billion (a 12% increase over 2006) in 748 deals (8% increase) during the year. The report defines Internet companies as those whose business model depends on the Internet, regardless of their primary industry category. They accounted for 16% of VC dollars in '07.

$9.5 billion went into life sciences, led by biotech companies, which accounted for $5.2 billion of that amount. That puts biotech second to software among categories pulling in the most money.

Clean tech companies--wind power and hydrogen fuel, for example--secured $2.2 billion in 2007, a 47% increase over a year earlier. Two of the five biggest VC deals of the year involved clean tech companies.

With so much money going into later-stage companies, it sets the stage for many to seek IPOs, acquisition, or some other exit strategy as VCs look for returns on their investments. Over the next two years, look for late-stage tech companies to be among those going public or getting acquired.