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Venture Investment Picks Up in Third Quarter

When the financial markets were zigzagging all over the place in the third quarter, venture capital investments were surprisingly robust. It doesn't quite make sense in this market environment from both ends of the equation—it's tough to raise funds and it isn't exactly easy to "exit" an investment as the IPO market is far from robust. But despite those headwinds VC investors see plenty of opportunities, particularly in early-stage startups.

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Dow Jones VentureSource just released the latest numbers: VC investments increased 29 percent, by dollar volume, with an 8 percent increase in deals in Q3, from the year-ago quarter.

That adds up to a total of $8.4 billion dollars in 765 deals for U.S.-based venture companies. The good news: the industry's on pace to near pre-recession levels by the end of next year, according to Jessica Canning, who oversees research for VentureSource. But Canning's skeptical how long this pace will last.

Who cashed in? Investors must have been inspired by Zynga and Groupon's IPO filings—consumer internet companies made major gains. The sector, which VentureSource defines as including online search, entertainment and social media, raised $1.3 billion for 104 deals, that's more than double the dollar amount raised by 94 deals during the year-ago quarter. In all of 2010 these types of companies raised $4.2 billion—through the first three quarters they've already raised $3.8 billion. This area was led by young startups—57 percent of deals were seed or first rounds.

In the healthcare sector there was an interesting flip in Q3 as medical device companies raised more financing than biopharma companies for the first time since 1998. While medical device companies saw a 15 percent rise in deal activity and a 30 percent increase in capital, biopharma saw capital invested decline. The overall healthcare industry, which also includes medical IT companies, saw an 11 percent decline in capital invested, despite more deals.

It's no surprise that energy start-ups continue to be strong. With renewable energy companies dominating the space, the energy and utilities industry raised $635 million in 33 deals, nearly twice the money raised a year earlier.

What's next for VC financing? A lot hinges on what kind of IPO activity we see this quarter. With Groupon heading out on its roadshow next week, investors around the country will be waiting to see how it prices.

Questions? Comments? MediaMoney@cnbc.com

  • Working from Los Angeles, Boorstin is CNBC's media and entertainment reporter and editor of CNBC.com's Media Money section.