Private company research firm CB Insights today released a report that shows venture investment remains strong with $6.5 billion in funding taking place in the fourth quarter of 2010, a gain of roughly 12 percent over the third quarter of 2010.
Overall, 2010 saw $23.7 billion of funding into 2,792 deals representing 14 percent growth in funding and 13 percent growth in deals over 2009.
The report noted a few highlights:
- New York outpaced Massachusetts for total number of deals in 2010 and is on a distinctly upward trend for the second half of the year while Massachusetts slowed down.
- 11 percent of deals were seed-stage investments (typically less than $1 million), consistent with the third quarter of 2010
- The Internet sector accounted for 37 percent of the total deals for the quarter
- California remained uncontested venture capital champion. The state saw 14 percent growth in deals on a sequential basis over third quarter 2010. Sixty percent of the state's funding went to Internet and health care companies.
Over the last few weeks, I've spent a lot of time meeting with venture capitalists and newly funded companies. Initially, it felt as if there was a bit of a bubble around financing new Internet companies, and while there are certainly have been some outrageous amounts raised (ahem, Groupon), the general premise is that the Internet has enabled so many new ideas and business models most investors are looking to put a stake in the ground in every category.
And, unlike the last funding bubble, a lot more companies have revenue on which to base their valuations as well as more predictable revenue streams. There are also less "me-too" companies which tend to pop-up when a category gets hot such as invitation sale sites and group coupons.
There are always copycats, but those with even a bit of differentiation have more viable business models than those are simply clones e.g. Pets.com and Petstore.com of questionable business ideas in the first place.
The real question in many of these Internet companies is how much they are innovating in terms of technology versus just evolving a business model to the Internet age. And, to the extent that the business model is changing, how defensible of a position is it when you are just making a process better, rather than creating true intellectual property.