VC investments up 29 percent in third quarter

Venture capitalists seem to be testing the waters once again, despite the volatile economic conditions.

Investors put $8.4 billion into 765 deals in the third quarter, representing a 29 percent increase in investment and an 8 percent increase in the number of deals compared to the same time period in 2010.

“Venture investment rose, putting the industry on pace to near pre-recession investment levels by the end of the year,” said Jessica Canning, global research director for Dow Jones VentureSource. “While it’s unclear how long venture capitalists can continue at this pace, given the weak fund-raising and difficult exit environments, the increase in activity … shows VCs are optimistic they will be able to support the next generation of startups.”

Medical device companies raised more venture financing than biopharmaceutical companies – there were 68 deals, raising $857 million, a 15 percent rise in deal activity and 30 percent increase in capital invested from the same period last year. In the biopharmaceutical sector, 78 deals raised $715 million, a drop in capital invested from a year ago.

Biopharamaceuticals usually lead the health care industry, but Canning says the change doesn’t mean a change in focus. VC companies still invested in early stage companies, while medical device deals were weighted toward later-stage deals.

Medical IT companies kept their yearlong pace, with 24 deals raising $207 million, not far from the same period last year, Canning said.

Overall, health care raised $1.9 billion, an 11 percent decline in capital invested but a 9 percent increase in deal flow.

But what’s hot? The Internet.

Consumer information services – online search engines, social media companies and Internet entertainment sites – raised $1.3 billion during the third quarter, more than double the financing in 2010.

“VCs are actively funding new consumer Internet companies, but second-rounds are lagging” said Scott Austin, editor of Dow Jones VentureWire. “If investors continue to focus on later-sate companies that would likely have edited years ago had market conditions been better, the hundreds of young Web startups that raised financing in the past two years will face intense competition for second rounds.”

IT companies also raised cash – $2.1 billion in the third quarter, a 9 percent increase in financing. Software companies collected the lion’s share of investment, while investments in semiconductors and hardware companies declined.

Capital investment in business and financial services spiked 65 percent in the third quarter, with 139 deals collecting $1.5 billion. The industry’s most active investment was business support services, which is driven by marketing, advertising and data management companies.

Seed and first-round startups accounted for 42 percent of the total deals in the third quarter, an uptick from a year ago. Second rounds dropped from 23 percent activity last year to 20 percent hit year, while capital picked up from 18 percent last year to 19 percent in the third quarter 2011.