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VC market opening up to social networking, cloud security

Marc Ferranti | June 21, 2010
The US and Europe money trail leads to cloud and Internet investments

NEW YORK, 18 JUNE 2010 - Venture capital funding took a nosedive in 2009 but is set to come back, especially in the Internet sector, as entrepreneurs look for business opportunities in cloud computing, Web security and social networking.

"Now that the economy has begun to show signs of improvement, we expect to see dollars flow more freely back into those sectors that offered the most promise before the recession began," said Mark Heesen, president of the National Venture Capital Association (NVCA).

Venture capitalists invested a total of $17.7 billion in the U.S. in 2009, the lowest level of dollar investment since 1997, according to the MoneyTree report by PricewaterhouseCoopers and the NVCA. The collapse of credit markets after the failure of banks like Lehman Brothers in 2008 forced business to stop making capital expenditures on IT, and blocked exit strategies such as IPOs and mergers and acquisitions for venture capitalists.

VC funding for Internet companies plunged from US$913 million in the fourth quarter of 2008 to $620 million in the first quarter of 2009. However, by the fourth quarter last year, funding for Internet companies had crept back up to $908 million, according to the MoneyTree report.

Results for the first quarter this year were not quite as high, with Internet-specific companies receiving $807 million, but venture capitalists say they see reasons for optimism.

Talking about the latest quarter, Bill Wiberg, of Advanced Technology Ventures, said: "The pace of investment is picking up, though maybe it's not quite captured by the first-quarter data .... my firm has done four investments over the last few months. Compared to 2009 there's a marked uptick."

Though the VC and M&A arena is still fairly depressed compared to prerecession levels, "cloud computing and related deals still generate a bit of buzz and excitement," said Tracy T. Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers LLP.

As cloud computing takes off, more and more entrepreneurs seek opportunities to provide Web services that complement the hosted services and cloud platforms that big vendors are offering, Lefteroff said. And as more personal and financial data is stored on the Internet, Web security is also attracting the attention of venture capitalists.

"There are a lot of people out there who are creative about breaking in and getting to that data so there's room for innovation on the security side," Lefteroff said.

"We'll see a few winners emerge in these categories, and they will point the way for others to follow," Lefteroff said.

A good portion of the top 20 Internet VC deals last year either involved security or IT services companies, according to data from Thomson Reuters. VC security deals included $31.5 million for SecureWorks and $40 million for LifeLock. Other top deals included $70 million into ExactTarget, an e-mail marketing services vendor that is building ties into ERP (enterprise resource planning) systems. Twitter, however, garnered the most VC money, listing two deals in the top 20 for 2009 that added up to $135 million.


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