Venture Capital Financing Up 10% in 2011; Web Startups Suffer

U.S. venture capitalists dipped deeper into their pockets to fund start-ups last year, despite a slowdown in the fourth quarter. The appetite for mature consumer web companies remained strong, while interest in early-stage companies tumbled.

In 2011, U.S. companies scored $32.6 billion in 3,209 venture capital deals -- a 10 percent increase in capital raised and 6 percent increase in deals from 2010. The median amount invested in a financing round rose 16 percent to $5 million, Dow Jones VentureSource said Friday.

The fourth quarter of 2011 saw a decline in both capital invested and deal activity from the third quarter as investors put $7.4 billion into 803 deals for U.S.-based venture companies. The decline, which mirrors a fourth-quarter drop in exit activity, is notable because the final quarter of the year is traditionally one of the most active for financings and exits.

The fourth quarter may have seen a temporary slowdown as venture capitalists reset their expectations for the exit market and entrepreneurs adjusted their companies' valuations to suit the current climate, Jessica Canning, global research director for Dow Jones VentureSource, said in a statement.

Overall in 2011, venture investment continued its steady post-recession ascent with notable strength in enterprise solutions, Canning said.

Large later-stage rounds raised by well-known web companies, including Twitter, Zynga and LivingSocial, pushed investment in the consumer information services industry to $5.2 billion for 452 deals during 2011, a 23 percent increase in capital collected and 14 percent increase in deal activity from the previous year.

While 72 percent of the capital raised for the sector went to later-stage deals, there was still strong interest in seed- and first-rounds, which accounted for 57 percent of the sector's deals.

The median amount invested in a first round for a Web start-up shrank 33 percent to $2 million, while the median for a later-stage round ballooned 43 percent to $10 million.

Venture capitalists still have a strong appetite for early-stage Web start-ups, but more mature companies may be swallowing some of the available cash, Zoran Basich, editor of Dow Jones VentureWire, said in a statement.

As companies delay the process of entering the public markets during a difficult time for IPOs, the additional venture funding they need is leaving investors with less capital for new investments.