VC investing highest since 2001

NEW YORK (CNNMoney.com) -- U.S. venture capital investments climbed to a five-year high in 2006 as investments in biotech and Internet-related firms soared, according to a report issued Tuesday.

Venture capital investments rose 10 percent to $25.5 billion, the highest level since 2001, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Financial.

Venture capitalists provide financing and management expertise to young start-ups with the aim of taking them public or selling them down the road.

Biotech attracted a record $4.5 billion in 2006, up 15 percent from a year earlier.

Big pharmaceutical companies facing expiring drug patents are turning to biotech firms to fill their pipelines, said Terry McGuire, managing general partner at Polaris Venture Partners.

Investments in medical devices climbed 29 percent to $2.7 billion, also a record. Together, biotech and medical devices accounted for nearly one-third of all venture capital invested.

The software sector attracted $5 billion -- the most of any single industry -- but growth was flat from the previous year.

Firms which rely on the Web received $4 billion, representing growth of 25 percent. These so-called Internet-specific companies can fall under a variety of the survey's industry categories, such as software or telecommunications.

Investments in energy start-ups rose sharply, more than doubling to $1.8 billion. About 40 percent of that amount flowed to alternative energy firms, which venture capitalists have flocked to in recent years.

A separate reported issued Monday by VentureOne and Ernst & Young showed similar trends in the VC industry.

Some blame overly enthusiastic venture capital investing for the rise of dot-com companies that might not have been ready for public markets, and thus for contributing to the boom-and-burst of the dot-com bubble. VC investing has recovered in the years following the burst of the dotcom bubble, but the comeback has been slow, if steady. That's partly because while the momentum for initial public offerings has been building, the environment remains cautious.

In the post-dotcom era, public markets have become more rational and there are higher thresholds IPO candidates must meet, said Steve Krausz, general partner at U.S. Venture Partners. But "there appears to be a good pipeline of offerings for fairly mature companies" in the first quarter, he added.

Private equity fundraising cools at year-end

Private equity in 2007