Report: Web 2.0 funding in U.S. slows, except at Facebook

Venture capitalists pumped a record $1.34 billion into 178 so-called Web 2.0 deals in the U.S. in 2007, up nearly 88 percent over amounts invested in 2006 — but social networking company Facebook Inc. accounted for 22 percent of it all.

And according to data unveiled Tuesday by Dow Jones VentureSource at the Web Ventures conference in Redwood City, Calif., deal growth is slowing.

From 2002 to 2006, Web 2.0 deal flow doubled every year, but 2007 only saw deals increase 25 percent to 178 from 143 deals in 2006. Nearly all of this growth happened outside Silicon Valley, 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,” says 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.”

Palo Alto, Calif.-based Facebook raised $240 million from Redmond, Wash.-based Microsoft Corp. (NASDAQ: MSFT) 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.

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 U.S. in 2007.

Even so, investors are placing a higher value on Web 2.0 companies. The data shows that 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.