Investments in software startups dominated the venture capital landscape in the third quarter of 2011, according to data from Thomson Reuters compiled in the quarterly MoneyTree Report. Venture capitalists invested $2 billion in the software industry during the third quarter, up 23% from the previous quarter. Investment declined slightly in every other sector tracked by the report: biotechnology, industrial/energy, medical devices and equipment and media and entertainment. All those areas combined pulled in $3.2 billion in venture capital during the third quarter.
Not since 2001 has the software industry seen this level of venture capital investment, according to John Taylor of the National Venture Capital Association. Nina Kjellson, general partner at InterWest Partners says the industry has seen “disruption due to major platform changes related to social media and mobile. Meanwhile, cloud computing is revolutionizing the enterprise side. Some say we spent ten years getting technology into the enterprise and now we will spend 10 years getting it out into the cloud.”
Of the deals done so far this year, 859 are first-time funding deals, versus 1,866 follow-on deals. The average deal size was $7 million, down from $7.9 million in the previous quarter. The National Venture Capital Association says the average deal size is falling for early stage deals, as investors shy away from the more capital-intensive clean tech and life sciences areas in favor of information technology companies that can typically be started more efficiently.
The MoneyTree Report is a quarterly study of venture capital investment activity in the United States. As a collaboration between PricewaterhouseCoopers and the National Venture Capital Association based upon data from Thomson Reuters, it is the only industry-endorsed research of its kind.
