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Deals up, venture investment flat in Philadelphia

The swoon may be over for the venture capital industry nationally with the number of deals and the amount invested rising in 2010 for the first time since 2007. But regionally the action was more subdued.

The PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report, released Friday, shows some improvement for an industry that has never returned to the manic heights it reached during the days of Internet Bubble 1.0 in 2000.

The question is: With nosebleed valuations of $50 billion for Facebook and $15 billion for Groupon being bandied about, are we in the middle of another Internet bubble?

Seth Levine, managing director of the Boulder, Colo.-based Foundry Group, said he doesn’t think so, but he admitted that some of the valuations for the social media firms are “frothy.”

“What significantly differentiates the current crop from those in the Internet bubble is they are gaining real traction, real revenue and real scale,” said Levine, whose venture firm is one of the investors in Zynga, a social game developer with its own frothy valuation reported to be more than $5 billion.

The quarterly MoneyTree Report, based on data from Thomson Reuters, counted 3,277 deals involving $21.8 billion in private investment during 2010. Those numbers are both up from about $18.3 billion invested in 2,927 deals in 2009.

In an encouraging sign for those starting companies, investment activity has shifted to more start-ups and early-stage companies. John S. Taylor, research and financial affairs executive for the NVCA, said the 1,510 deals involving companies in those early stages of development that were done in 2010 were the sixth-highest total since the survey began in 1995.

The number of companies that raised venture capital for the first time also rose to 999 last year from 774 in 2009. While that remains at the low end of the typical 1,000 to 1,200 first-time fundings that occur annually, Taylor said it’s a healthy sign that new companies are being brought into the venture capital “ecosystem.”

The Philadelphia area remains a venture capital side street compared with the superhighway of Silicon Valley, where $8.5 billion was invested in 2010, and thruway of New England, the destination for an additional $2.5 billion.

Locally, about $431 million in venture capital was invested in 118 companies during 2010. The number of deals was up 24 percent from 95 in 2009, but the amount invested was down slightly from $435 million.

Len Combs, a PricewaterhouseCoopers partner focused on life sciences in Philadelphia, said he sees the rising deal flow as a positive sign. With the economy picking up, the increased number of financings shows that venture capital firms are “willing to put their money to work now,” he said.

Nationally, the number of seed-stage deals climbed 4 percent and early-stage deals increased 25 percent in 2010. Both categories accounted for 46 percent of all deals last year.

Of the area companies that received funding in 2010, 64 were classified as in the seed/start-up or early stages, which tend to be businesses that are less than three years old and may or may not be generating revenues.

Philadelphia diverged from national trends last year as biotechnology remained the top sector for venture investment, in terms of both deals and dollars. Nationally, software firms attracted $3.96 billion in 2010, while biotech firms received $3.69 billion.

In the Philadelphia area, biotech dominated with 30 percent of the deals and attracted 57 percent of the funding during 2010. Venture firms invested $244 million in 35 local biotechnology firms last year, compared with $180 million in 26 biotech firms in 2009.

In fact, the four biggest deals in the fourth quarter locally were in the biotech sector. Malvern-based TetraLogic Pharmaceuticals Inc., which is developing cancer treatments, raised $22.83 million. PhaseBio Pharmaceuticals Inc., also of Malvern, landed $15.18 million, while Horsham’s Galleon Pharmaceuticals Inc. raised $10 million and Yardley’s Velcera Inc. received $6.15 million.

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Kristen Fitch

Senior Director, Marketing