Web 2.0 Funding Jumps 88% in ‘07, Facebook Accounts for 22%

The Web 2.0 investment boom may be peaking, even as venture capitalists pumped a record $1.34 billion into 178 Web 2.0 deals in the U.S. in 2007, up nearly 88 percent over amounts invested in 2006, according to new data from Dow Jones VentureSource, MarketingCharts reports.

But just one company - social-network Facebook, which raised at least $300 million - accounted for 22 percent of all funding that went into this sector in 2007, according to the data (via WebGuild).

And deal growth is slowing. From 2002 to 2006, Web 2.0 deal flow doubled every year, but in 2007 the number of deals increased 25 percent, to 178 from 143 in 2006 (see table of Web 2.0 investment by region, ‘06-’07.)

But most of that growth happened outside the San Francisco Bay area, the longtime home of web-related innovation and investment.

“On the surface, the numbers look fine for the Bay Area - $720 million invested in 72 deals - but take Facebook’s $300 million out of the statistics and you see a very different picture,” said Jessica Canning, director of global research for Dow Jones VentureSource.

“Web 2.0 deals in the Bay Area actually dropped from 74 deals in 2006 to 69 last year and investments were down 3 percent from the $431 million invested in 2006. It’s clear that the real growth in the Web 2.0 sector is happening outside of the Bay Area.”

The largest Web 2.0 deals:

• Facebook, based in Palo Alto, Calif., raised $240 million from Microsoft in a highly publicized corporate round as well as at least $60 million more from individual investors last year.
• The next-largest Web 2.0 deal was the $44 million first round for Ning, also of Palo Alto, which lets users create their own niche social networks.

Deals Sizes Stay Relatively Small But Valuations Jump

Despite these larger deals, Web 2.0 companies still remained a relatively inexpensive investment for venture capitalists, according to the data:

• The median deal size for these companies reached a record $5 million in 2007, up from $4.1 million in 2006.
• This is still far behind the overall $7.6 million industry median for a venture capital deal in the US in 2007.

“The beauty of Web 2.0 companies is that they can do so much with so little. A few million dollars and they’re not only up and running but attracting eyeballs and advertisers,” said Canning.

“But 2008 may be a make-or-break year for many Internet companies with business models relying on advertising. The slumping economy, coupled with a slowdown in click-through rates for online advertising, is going to pose a real challenge to their ability to generate revenues and position themselves for an exit.”

Even so, investors are placing a higher value on Web 2.0 companies, according to the data:

• In 2007, the median pre-money valuation for a Web 2.0 company reached a new high of $10 million, up from $6 million in 2006.
• Still, that’s well below the overall $16 million median pre-money valuation seen for venture-backed companies in 2007.

About the data: Companies included in the study have a business model that revolves around a dynamic interface facilitating participation through such methods as user-created content, networking, and collaboration. Applications include podcasting, tagging, blogs, social networking, mashups, and wikis. Technologies used in these applications include AJAX, RSS, SOA, CSS, XHTML, Atom, and rich internet applications.

The investment figures included in this release are based on aggregate findings of VentureSource’s proprietary research. The data was collected by surveying professional venture capital firms, through in-depth interviews with company CEOs and CFOs, and from secondary sources. These venture capital statistics are for equity investments into early-stage, innovative companies and do not include companies receiving funding solely from corporate, individual or government investors.