Wall Street Beat: VC money pours back into Internet companies

The software sector attracts more investments than any other sector, as VC investments grow year over year

Venture capitalists poured more money into Internet companies last year than they have since the dot-com bust, according to a survey published Friday.

Internet companies in the U.S. took in US$7.1 billion from VCs in 1,059 deals in 2013, the highest level of Internet investment in terms of dollars and deals since 2001, according to The MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters. In comparison, VC investment in Internet companies totaled $6.7 billion in 995 deals in 2012, another strong year, according to the MoneyTree report.

In addition, VCs invested $110 billion in 1,523 software industry deals last year, the highest level in both dollars and number of deals for the sector since 2000, according to the MoneyTree report. VC dollars going into software rose 27 percent year over year, while the number of deals increased 10 percent.

The amount of money invested in the software industry accounted for 37 percent of total VC investments in 2013, the highest percentage since the MoneyTree report was initiated in 1995.

All this is taking place against a backdrop of a generally strong VC environment, as VCs invested $29.4 billion in 3,995 deals across all sectors in 2013, a year-over-year increase of 7 percent in dollars and 4 percent in deals, according to the report.

Companies involved in big data, mobile apps, security, digital marketing, and medical and health software are among those that are especially interesting to VCs, according to Mark McCaffrey, PwC's U.S. and global software leader.

Top deals in the fourth quarter of 2013 included a $225,000 investment in Pinterest, a site for sharing photos, recipes and other items of personal interest, and a $177,514 investment in Palantir Technologies, a government contractor in the systems integration business, according to MoneyTree data.

Going into 2014 a sense of optimism prevails, but this does not mean that the tech industry is going through a bubble of the sort that arose in 1999 and 2000, McCaffrey said.

"Bubble is a dirty word that people don't like to talk about," McCaffrey said. "There is always the risk of macroeconomic conditions causing something to happen."

However, even though valuations are going higher, "the value proposition for technology has never been so clear," McCaffrey said. For example, mobile devices and applications are becoming more global than they ever have been, while at the same time companies across all sectors are using technology to change their business models and develop better customer relationships.

There also are fewer VC firms than there were during the dot-com bubble, making for a less frenetic, more stable investment environment, McCaffrey pointed out.

VCs like software companies because software is not as capital-intensive as businesses in other sectors; there is no need for the type of heavy manufacturing costs hardware companies bear, McCaffrey noted.

In addition, the macroeconomic environment now looks better than it has in years, with the U.S. economy growing and Europe slowly coming out of its slump.

The strong stock market also plays a part, creating an environment for a strong IPO market, which in turn gives VCs good possibilities for a return on their investments.

Major public tech companies themselves play a part in keeping the VC market strong for private software and Internet companies. But they are in the investment game for reasons that are different from VC companies.

Tech companies use investments "to acquire innovation" and gain access to new technology as the pace of innovation quickens, McCaffrey said.

Closing out the second full week of 2014, the Nasdaq Computer Index is up about 30 percent over its level of a year ago, and the IPO market continues to look strong.

"This year was the earliest start for the IPO market in over 10 years, according to the SEC filings," according to John Fitzgibbon, writing on the IPOScoop website. This week, "the SEC's filing window started spitting out deal after deal plus pricing terms after pricing terms. By week's end, the calendar had eight IPOs expecting to raise over $3.7 billion."

Of companies filing for IPOs, tech businesses were in third place, after financial and health care companies, with 14 filings in the pipeline, according to IPOScoop.

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Tags business issuesPinterestNational Venture Capital AssociationThomson ReutersPalantir TechnologiesinvestmentsinternetPricewaterhouseCoopers

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Marc Ferranti

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