Venture capital investment doubles for Web 2.0

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Web 2.0 companies worldwide were showered with US$844 million in venture capital funding in 2006, more than twice as much as the previous year, according to research released Wednesday by Ernst & Young and Dow Jones VentureOne.

The finding shows an acceleration of a trend in which venture capital invested in Web 2.0 has practically doubled in size every year since 2002, with most of the growth in the United States and Europe. There were 167 investment deals in 2006, including 126 in the United States.

A $30 million deal, one of the largest, benefited n2N Commerce, a software company in Cambridge, Mass., that makes on-demand, e-commerce products for large retailers. But more than half of all U.S. Web 2.0 investments were made in the San Francisco Bay Area.

Web 2.0 typically refers to Internet services that let people collaborate and share information. The companies included in the new funding research have facilitated user-created content, networking and collaboration with applications like podcasting, tagging, blogs, social networking, mashups and wikis. "Through Web 2.0 offerings, the Internet is having a profound influence on the way we share, collaborate and interact socially, not just in developed markets but also in fast growing emerging markets," Gil Forer, global director of Ernst & Young's venture capital advisory group, said in a press release.

"From the investor perspective, the low capital requirements, potential high return and the faster time from development to revenue are the primary drivers of the increase in venture capital investment in the Web 2.0 segment. In addition, success stories such as YouTube have had a positive impact both on entrepreneurs and investors."

The investment push in Web 2.0 does not seem to be slowing down, researchers say.

"Based on the median size of Web 2.0 deals and the conservative level of pre-money valuations for these companies, the data does not indicate that we are entering bubble territory," Stephen Harmston, director of global research for VentureOne, said in a press release. "Rather, what we are seeing is robust investment activity aimed at a still emerging business area."

France was the busiest European country for Web 2.0 venture capital deals, with seven investments in 2006 totaling $39.3 million. China posted 21 Web 2.0 deals, the same number as the previous year. The dollar investment in China dropped 26 percent to $61.3 million.

The busiest venture capital investors in Web 2.0 are Benchmark Capital, Draper Fisher Jurvetson, Sequoia Capital and Omidyar Network.

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