Israel Digital News

Venture capitalists continued to favor the innovative activity of Web 2.0 companies last year, as $844.4 million was directed into 167 deals in 2006, more than twice as much money and nearly twice as many deals as occurred in 2005. According to new research by Ernst & Young/Dow Jones VentureOne Data.

Most of the growth remains centered in companies based in the US and Europe. The US dominated the Web 2.0 market, with 126 deals and $682.7 million invested, an 83% increase in deals from 2005 and a 136% increase in capital. San Francisco Bay Area was the busiest region in the US for Web 2.0 deals and was home to more than half of all financings in 2006.

Venture capital funds invested $100.5 million in 20 European Web 2.0 startups in 2006, up from four deals in 2005. The amount invested in Europe is more than a 200% increase from 2005. China posted 21 Web 2.0 deals, the same number that occurred in China in 2005. Investment declined by 26% to US$61.3 million.

Israel had two venture-financed Web 2.0 deals in 2006 and $22 million invested, a jump from one deal and only $1 million invested the year before. In July 2006, the Israeli Web 2.0 video entertainment firm, MetaCafe, has completed a second financing round, raising $15 million from Benchmark Capital and Excel Partners. In December 2006, enterprise-grade project management services provider Clarizen closed a $7 million round of financing from Benchmark Capital and Carmel Ventures. The research did not include the $2 million funding round of social content sharing company eSnips from Greylock Partners and Gemini Israel Funds.

"Web 2.0 is certainly a very fast-growing segment of the overall venture capital market right now. However, based on the median size of Web 2.0 deals and the conservative level of pre-money valuations for these companies, the data does not indicate that we are entering bubble territory," said Stephen Harmston, Director of Global Research for VentureOne. "Rather, what we are seeing is robust investment activity aimed at a still emerging business area."

The median pre-money valuation for a Web 2.0 company in 2006 was $6 million for both US based companies and worldwide. The median size of a Web 2.0 deal on a global basis was $5 million in 2006, an increase from the $3.3 million median the year before. The median size of a financing round was also $5 million in the US and China, but was actually higher in Europe last year at $6 million.

"The Internet has impacted every sector from media to retail to hospitality and consumer products. Now through Web 2.0 offerings, the Internet is having a profound influence on the way we share, collaborate and interact socially, not just in developed markets but also in fast growing emerging markets," indicated Gil Forer, Global Director of Ernst & Young's Venture Capital Advisory Group. "From the investor perspective, the low capital requirements, potential high return and the faster time from development to revenue are the primary drivers of the increase in venture capital investment in the Web 2.0 segment. In addition, success stories such as YouTube have had a positive impact both on entrepreneurs and investors."

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