Investments into the E&M sector still solid in Q2

Deal volume unchanged, dollars drop, investments remain above historical norms.

The second quarter brought a mixed bag for VC investments in the Entertainment & Media industry. While the number of deals remained the same at 66 for the quarter, dollars dropped 22% from $425 million in Q1 to $332 million in Q2. Accordingly, the average deal size in Q2 also experienced a decline, with each company receiving an average of $5 million each. Despite the dip in investing from last quarter, the Q2 total still falls within the historical norms of the past several years.

Big deals

Despite the drop in dollar volume, Q2 had a number of big ticket deals, with the top five ranging from $26 million to $15.5 million. Q2"'s big winner? Menlo Park"'s Jingle Networks Inc., snagging a cool $26 million. Jingle Networks is creating an exciting new media network through 1-800-FREE411, the nation"'s leading advertiser-supported directory assistance service, offering consumers a free alternative to the high cost 411 services provided by landline carriers and mobile phone companies. 1-800-FREE411 is supported by national and local advertisers who use 1-800-FREE411 as both a branding and direct-response media channel to target messages to callers within the context of a normal-length 411 call. www.free411.com on the Internet provides consumers with an easy-to-use Web-based resource for telephone number lookups.

Coming in second, with $25 million, was Palo Alto"'s Facebook Inc. Founded in 2005 by five Harvard University undergraduates, online directory Facebook connects people through social networks at schools. Students post photos and information about themselves through online profiles published on Facebook.com. A Facebook requirement is that users have college e-mail addresses; some faculty, staff, and alumni also join. The site was launched as an online version of the Harvard Facebook. (The name comes from books of freshmen's faces, majors, and hometowns that colleges distribute to incoming students.) Investors include Paypal co-founder Peter Thiel and Accel Partners .

Rounding out the top three with a $20 million investment, is CinemaNow, Inc. Located in Marina del Rey, Calif, CinemaNow, Inc. (www.cinemanow.com) legally offers downloads of more than 4,000 feature-length films, shorts, music concerts and television programs from more than 250 licensors including 20th Century Fox, ABC News, Disney, HDNet, Lionsgate, MGM, Miramax, NBC Universal, Sony, Sundance Channel, and Warner Bros. Entertainment. Founded in 1999, CinemaNow counts EchoStar, Index Holdings, Menlo Ventures, Transcosmos, Microsoft, Lionsgate, Cisco Systems and Blockbuster as investors.

Silicon Valley -- Once again the promised land

With a staggering 47% of the quarter"'s deals and 54% of the E&M dollars, Silicon Valley--a perennial favorite--is once again king of the hill. Add in the rest of California, and you get a whopping 58% of all deals and 67% of all dollars--the Golden State indeed. For the record, Eastern leaders New York and New England came in neck-and-neck with six and seven deals each valued at $11 and $16 million respectively.

Content content content

The Internet Content subsector once again owned the quarter, with 68% of the dollars and 61% of the deals. Of the remaining subsectors, Entertainment & Leisure and Internet ECommerce came in second and third, with 11 and nine deals each, valued at $49 and $54 million respectively. Commercial communications came in a distant fourth, with five deals valued at measly $3 million.

Hope for the future

Young E&M companies did very well in Q2 with Early Stage companies getting the lion"'s share of the deals--25, representing 38% of the total. Add in the Startup/Seed deals--another eight--and you get half the deals for the quarter. Dollars, however, tell a different story, with half going to Expansion stage companies alone.

In summary

Overall, Q2 brought good news--and respectable investment level--to the E&M industry. While unable to maintain the huge dollar volume from Q1, the number of deals kept the momentum going and there were several sizable deals in the quarter. In addition, the growth of activity in the earlier stage companies provides evidence that investment in the sector overall will continue at a moderate--and more importantly--sustainable level.

The above article is based on results from the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data provided by Thomson Financial. The report is a quarterly measure of cash-for-equity investments by the professional venture capital community in private, emerging companies in the U.S. For more information or to download an executive summary of this quarter's results, please visit www.pwcmoneytree.com.
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