VC funding for web reaches 10 year high

Venture capital investments continued to grow at a rapid clip in the second quarter of 2011, with VC firms investing $7.5 billion across 966 deals, according to the latest MoneyTree report from PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA.) But some industry experts are saying that the current level of VC activity could be too good to be sustained.

The second quarter of 2011 saw the highest total amount of money invested by VCs since the second quarter of 2008, according to the MoneyTree report released this week. Quarterly venture capital investment activity increased 19 percent during Q2 compared to the first quarter of 2011, during which VCs invested $6.3 billion in 814 deals (click on image to expand):

And if you think VCs have been putting a lot more money than usual into web startups, you’re absolutely right. Investments in Internet-specific companies rose to the highest quarterly level since 2001. Venture capital firms pumped $2.3 billion into 275 web-oriented companies during Q2 2011, a 72 percent increase in dollars and a 46 percent increase in such deals from the first quarter of the year:

Growth is normally a good thing for the venture capital ecosystem, but it may be starting to get out of hand. “This quarter’s increased investment levels signals an incredible opportunity for job creation and innovation, but if current dynamics continue, it will not be sustainable,” NVCA president Mark Heesen said in a release accompanying the MoneyTree report. “This level of investment cannot continue if we do not start to see a pick-up in exits and, subsequently, fundraising.”

Venture capital firms have had difficulty raising new funds for several years now. And while there is a lot of talk about the recent splashy exits such as LinkedIn’s blockbuster IPO, the fact is that the current return on investment is still not as high as many VCs — or their institutional investors — would like.

But for now, at least, it’s a good time to be building a venture-backed business. “Overall, the increase in investment levels in Q2 remains encouraging for entrepreneurs,” said PwC global managing partner Tracy T. Lefteroff. “At the current pace of venture capital investing, 2011 is on track to exceed $26 billion, which would put it as the sixth most active year in VC investing history.”