Web 2.0 a tiny percentage of U.S. venture capital

September 25, 2006

Sand_Hill_Road_Google_MapsA favorite pastime of journalists writing about the latest generation of Web 2.0 Internet services is to handicap how long before history repeats itself and the next Internet bubble forms — then pops.

New data show Web 2.0 companies are fast gaining investment, with 49 deals attracting $262.3 million in the first half of 2006, according to Dow Jones VentureOne. At that level, it’s on track to more than double from the $199.1 million for 51 deals invested during the whole of 2005.

But that figure is only 2 percent of the total $13 billion amount invested in 1,213 U.S. venture-backed companies in the first half of 2006, according to VentureOne. 

“While the investment levels are growing, so far the data shows that Web 2.0 is a relatively small portion of the market,” according to the study.

What the report does not calculate is the incremental amounts of early-stage funding flowing into Web 2.0 start-ups from angel investors, which could be significant, if hard to measure.

The median size of a Web 2.0 financing round this year is $4.4 million, compared to $7.5 million for a venture financing overall, according to VentureOne.

FlickrMost Web 2.0 companies are focused on consumers. Half are generating revenue. Only three are profitable, the data shows. 

None of the venture-backed Web 2.0 companies have achieved an IPO to date. Fewer than 10 have been acquired, including companies such as MySpace, now a unit of Rupert Murdoch’s News Corp. and del.icio.us, which was purchased by Yahoo Inc. 

Seven of the 51 to receive funding in the first half were late-stage investments, typically the on-ramp to potential initial public offerings.

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