Profit Minded

Data shows that the future of the startup ecosystem is bright

“It’s an exciting time to be an entrepreneur with a software company.” That’s according to Mark McCaffrey, whose company PricewaterhouseCoopers released a report today revealing that venture capitalists’ investments in software companies in the third quarter of 2013 exceeded $3 billion for the first time in 12 years.

In addition, the fact that more than half of the quarter’s deals came from early and seed stage deals prompted McCaffrey to state, “There’s credible reason to be optimistic about the future of innovation and the vibrancy of the startup ecosystem.”

All told, VCs invested $7.8 billion in 1,005 deals in the third quarter of 2013, representing a 12 percent increase in dollars invested and a 5 percent increase in the number of deals over the last quarter, according to the MoneyTree Report from PwC and the National Venture Capital Association, which is based on data provided by Thomson Reuters. McCaffrey predicts that at the current pace of investing, “total venture capital investments in 2013 [should] exceed the annual total from 2012.”

But the real winners are software companies, which pulled in 9 of the 11 largest investments in Q3. "More venture capital dollars are going into more software deals than we’ve seen in the past decade,” said McCaffrey, who is global technology partner and software leader at PwC. “The continued increase in valuations for innovative and disruptive technologies in software-related companies, coupled with the increase in exit activity, is driving venture capitalists to make more investments in this space.”

Why are investors gung-ho on software? John Taylor, head of research at the National Venture Capital Association, says it’s because software is a “natural increased area of focus given that many tech deals are less capital intensive to get to proof of concept.”

Sectors that followed software in terms of VC investment are biotech and medical devices (although life science investing overall is at the lowest nine month total since 2005), and media & entertainment. Internet-specific companies saw a decline in investment, as did consumer products & services and cleantech. In fact, the third quarter of 2013 marks the seventh consecutive quarter of declining investment levels in the clean technology sector, according to the report.

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