West Coast Editor

Not since the first part of 2002 have venture capitalists put as much money into as many deals as they did during the second quarter of this year, according to second-quarter numbers from the MoneyTree Report by PricewaterhouseCoopers, and the recent, powerful upsurge in biotech investing played a major part.

Based on data from Thomson Financial, and assembled with help from the National Venture Capital Association, the report showed venture investing overall grew in the second quarter to $6.3 billion in 856 deals, representing a 2 percent increase in dollars and a 5 percent jump in deals from the prior quarter.

Biotech has "increased remarkably," said Darrell Pinto, director of global private equity performance for Thomson, during a conference call.

Venture money into the life sciences sector (biotech and medical devices, calculated together) rose 10 percent to $1.8 billion in 185 deals over the first quarter of 2006, and biotech specifically got 34 percent more dollars, with the highest number of deals in the history of the report: 112.

Tracy Lefteroff, global managing partner for PricewaterhouseCoopers, said biotech "rebounded in a major way, [after] a significant drop last quarter."

Of the top 10 deals in the quarter, five were in the biotech sector, and within the biotech sector, there were more than double the number of start-up and seed companies that got funding over the last quarter. What's more, they took in more than triple the amount over the previous period.

Lefteroff pointed to a significant pre-IPO market, "with a number of companies, we anticipate, trying to access capital markets in the fall."

John Taylor, director of research at the National Venture Capital Association, acknowledged that a first quarter to second quarter increase is not unusual, but pointed out that it's been four years since "we've seen a step up from the first to second quarter where the actual increase in the earlier rounds comes at the expense of the [later-stage] deals. We appear to be in new territory now."

Biotech's rise was offset by a stark decrease in device-company funding, which dipped 22 percent to $549 million in the second quarter, while staying well within the last 12 months' range.

Also, biotech was among the industries to attract the highest level of first-time cash in the second quarter, along with software and energy, though medical devices did well in that area, too, as did the media/entertainment and telecom enterprises. PricewaterhouseCoopers expects 2006 to set a five-year high in overall venture funding.

Gil Kliman, partner with Menlo Park, Calif.-based InterWest, recalled the VC peak in 2000, "followed by a really bad crash, kind of like a bad amusement park ride, and now things seem to be getting better. The industry sort of corrected to a new, stable state, where we're investing about $20 billion a year, and that's probably a good thing. Probably the $100 billion that was invested in 2000 [during the dot-com bubble] was too high."

Venture play in start-up and early stage firms stayed flat from the previous quarter in terms of dollars, but jumped by 13 percent in the number of deals, with $1 billion going into 268 deals. Valuation data trails investment figures by one quarter, and the report said the average post-money valuations of early stage companies fell slightly to $14.06 million for the 12 months ending in the first quarter of 2006.

"Life sciences are always going to be an important part of the venture industry, and now it seems to be coming back in style," Kliman said. Many VC funds established in recent years are devoted entirely to biotech and devices, he noted.

"Don't over-read the [latest] quarterly numbers, but they are a good indicator that the industry is still excited about the promise of new drug treatments - and that could [mean] really excited, because some of these projects take $50 [million] to $100 million of private capital before they can even go public," Kliman said.

He cited, however, to "a little bit of an inconvenient truth, so to speak, about what we're dealing with here. Rather than a global warming, we've had a global cooling of the IPO market over the last few years. It has not really come back, after the collapse of the bubble," which is an important truth for "all of our technology-based companies."

Kliman is keeping the faith. Comparing biotech efforts to a time-consuming Jupiter probe, he said the IPO zone could revive in three to five years.

"We think there will be a big up cycle ultimately for IPOs in general and specifically for biotech," he said. "For these public markets, just like the Red Sox, you gotta believe."