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By Mel Duvall
Venture capitalists pumped a record $1.34 billion into 178 Web 2.0 deals in the U.S. in 2007, an 88% increase over the amount invested in 2006. However, the survey by Dow Jones VentureSource also indicates that the amount of money flowing into the sector may be peaking.
One company, Facebook, which raised at least $300 million in 2007, accounted for 22% of all funding that went into the sector.
Jessica Canning, global director of research for VentureSource, said the number of Web 2.0 deals has doubled every year from 2002 to 2006. But 2007 saw only a 25% increase in the number of deals, 178 compared to 148 in 2006. Surprisingly, most of the growth occurred outside the San Francisco Bay region, the longtime home of Web-related investment.
"On the surface, the numbers look fine for the Bay area - $720 million invested in 72 deals," said Canning in releasing the report. "But take Facebook's $300 million out of the statistics and you see a very different picture. Web 2.0 deals in the Bay area actually dropped from 74 deals in 2006 to 69 last year and investments were down 3% from the $431 million invested in 2006."
The New England region appeared to be the biggest winner in the shift in funding, attracting $158 million in 72 deals in 2007 compared to $79 million in 15 deals in 2006. Southern California took in $115 million in 14 deals in 2007, compared to $41 million in 10 deals in 2006. Next in line was the New York City region, attracting $115 million in 14 deals in 2007, compared to $18 million in 9 deals in 2006.
Facebook, a social networking site based in Palo Alto, Calif. raised $240 million from Microsoft in 2007 as well as at least $60 million more from individual investors. The next-largest Web 2.0 deal was the $44 million raised by Ning, also of Palo Alto. Ning lets users create their own niche social networks.
Aside from the big deals, investing in Web 2.0 firms remained relatively inexpensive for venture capitalists. The median deal size was $5 million, up from $4.1 million in 2007.
"The beauty of Web 2.0 companies is they can do so much with so little," adds Canning. "A few million dollars and they're not only up and running, but attracting eyeballs and advertisers."
Companies considered in the study were deemed to have a business model that revolves around a dynamic interface facilitating participation through such methods as user-created content, networking and collaboration. This included such applications as podcasting, tagging, blogs, social networking, mashups and wikis.
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