VC firms doubled their investment in U.S. Web outfits in the first quarter, but a weak IPO market means they'll have to keep injecting cashVenture-capital investors poured record amounts into Internet startups in the first quarter as companies sought to raise cash ahead of a possible recession. But a weak start to the year for initial public offerings and acquisitions of these young companies may mean VCs will need to keep funneling cash their way for a while longer.
First-quarter investments in U.S. Internet companies more than doubled from a year ago, to $1.58 billion, across 170 deals, the highest numbers on record, according to Dow Jones VentureSource (NWS). The amount invested also was up nearly 50% compared with the fourth quarter of 2007. It was the first time that VentureSource's "information services" category, laden with so-called Web 2.0 startups, eclipsed traditional packaged software as the No. 1 information technology investment category.
The surge in deals, which ran counter to an overall decrease in first-quarter VC investments across all industries, suggests that Web startups may have been buttressing themselves against the economic downturn and the risk that funding might grow scarce if the credit crisis worsens. "Because of uncertainty in the public markets, they may need to get financing earlier to carry them," says Jessica Canning, VentureSource's global research director.
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