VCs Still Pumping Money Online

Consumer Internet spending more than doubles from 2010

Looks like venture capitalists haven't lost their enthusiasm for Web startups.

According to new data from Dow Jones VentureSource, VCs invested $1.3 billion in 104 deals for consumer Web companies (a category that includes search, entertainment, and social media) during the third quarter of this year. That's more than double the dollar amount invested during  the same period in 2010. Not that the last three months seem all that unique—investments in this category have been heavy for the whole year. In the first quarter, for example, they totaled nearly $1.6 billion, five times the amount invested in 2010.

It's a phenomenon that VCs have commented on—lots of deals, many of them small rounds for very young companies. VentureSource says 57 percent of the deals in this sector were for first rounds of investment, or for even earlier seed rounds. Later-stage investments, on the other hand, only made up 30 percent of the deals, but accounted for $1 billion, the vast majority of the money invested.

That pattern is good for entrepreneurs who just want a little cash to get started with a Web company. A few years down the road, things could get trickier. In the VentureSource press release, VentureWire editor Scott Austin predicts that "the hundreds of young Web start-ups that raised financing in the last two years will face intense competition for second rounds." At September's mobilize conference, partners at Canaan Partners and Kleiner Perkins Caufield & Byers went further, both predicting that there will be a "day of reckoning" when the glut of seed-funded companies come looking for more money.

The consumer Web has grown more quickly than other parts of the venture landscape, but it isn't alone in its apparent good health. Total venture funding increased 29 percent compared to last year, with $8.4 billion spent on 765 deals. However, VentureSource notes that venture funds are having a tough time raising money themselves, so that has to eventually affect startups too.