Investing Trend: Information Technology/Tech Startups

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By Linda Doell

If last year is any indicator of things to come, expect the information technology and tech startups to continue to draw the attention and backing of venture capital investment.

Just look at the numbers. Canadian technology companies that sough VC funding did well in 2011, with funding 30% more raised than the previous year. Canadian firms also benefitted from cross-border deals in the United States.

According to a MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters, venture capitalist investments south of the border in the United States clocked in at $28.4 billion in 3,673 deals in 2011. The investment amount was an increase of 22% from the previous year and represents the third highest annual investment total in the past 10 years.

Investors seemed to flock to larger deals with more established startups, which if that trend continues, will increase competition for the remaining money among fledgling startups seeking beginning rounds of funding. Such increased competition should weed out the less viable startups at an earlier stage and leave stronger young startups -- a good thing for investors.

"As previously projected, venture capital investing in 2011 exceeded 2010 levels and ranks in the top three years for VC investing in the past decade," said Tracy T. Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers in a statement announcing the report. "We saw a resurgence in investments in Clean Technology and Internet-specific companies in 2011, as well as a bit of a jump in average funding in the Internet sector.

"However, while venture capitalists continue to show their interest in these areas, they are acting prudently and not chasing excessive valuations," he said. "Accordingly, despite the increase in investing, we're unlikely to see these sectors overheat like we saw in the 1999 to 2000 era."

The U.S.-based software industry saw $6.7 billion invested in 1,004 deals a 7% increase over 2010. Internet companies also saw a boost in investing, with $6.9 billion split among 997 deals, which was a whopping 68% hike from the previous year.

According to that report, the largest U.S. venture capital IT/tech deals of 2011 were:

Dropbox Inc.: The California provider of online file storage and sharing services received more than $250 million from eight VC firms.
WhaleShark Media Inc.: The Texas firm runs a marketplace for coupons and deals. It gathered $150 million from two firms.
Gilt Group Inc.: The New York company got more than $138 million for its private online shopping community from nine VC companies.
Groupon Inc.: The Chicago company collected more than $136 million from 10 firms.
Cvent Inc.: The Virginia company received almost $136 million for its web-based software for event planning from three companies.

As 2012 rolls on, investors can expect more tech startups to be vying for funding -- and not all will be in the cloud computing space, said IT research company Gartner Inc.'s Vice President David Cearley.

In the Financial Post, Cearley predicted tech VC trends for this year to include more deals surrounding media tablets, mobile-centered applications and increased use of flash memory in electronic devices.

What trends do you see for tech startups in 2012?