Software really is eating the world.
Venture capital firms in the United States pumped more money into software startups last quarter -- $3.6 billion -- than at any point in 12 years, according to new industry figures.
Software companies also notched the most deals in the third quarter, at 420; that was a 23 percent uptick from the previous three months. For good measure, nine of the 11 largest investments in the third quarter went into software.
"It's always a good sign to see a lot of deals flowing and valuations going up," said Mark McCaffrey, who leads the U.S. software practice for PricewaterhouseCoopers. His firm compiled the quarterly MoneyTree report with the National Venture Capital Association, using data from Thomson Reuters.
With the window for initial public offerings of stock wide open, and deep-pocketed public companies continuing to acquire smaller startups, "the VCs are starting to see a healthy path" to return on investment, McCaffrey said.
All told, venture firms invested $7.8 billion in 1,005 deals nationwide in the third quarter. That was a 12 percent increase in terms of dollars and a 5 percent hike in the number of deals compared with the second quarter; however, tech investors still slightly lag the pace of 2011, when funding peaked in anticipation of Facebook's IPO.
Silicon Valley, as always, took in the lion's share of venture dollars -- 46 percent in the latest quarter.
But as is also traditional, the wealth wasn't spread around evenly among the industry sectors the report tracks. Software's dominance came at the expense of other categories such as biotechnology and clean energy.
Investments in life sciences, which include biotech and medical devices, saw slightly more deals in the third quarter than in the second, but dollars invested dropped 26 percent. And through the first nine months of this year, life sciences investing is at its lowest point since 2005.
McCaffrey noted that biotech was still the second-most-popular sector in the quarter, with $852 million going into 123 deals. And with a recent uptick in IPOs, he predicted the industry will retain its venture capital fans.
He was much less optimistic about cleantech, which suffered its seventh consecutive quarter of declining venture investment.
"There's nothing to say that trend's going to turn around anytime soon," McCaffrey said. "It's a very capital-intensive industry without a clear exit strategy" for investors.
John Taylor, head of research at the venture capital association, pointed out that more than half of the quarter's deals were in early and seed-stage startups. Dollars invested in early-stage companies -- those past the garage phase but still small -- rose to their highest level in 12 years, the report found.
"There's credible reason to be optimistic about the future of innovation and the vibrancy of the startup ecosystem," Taylor said.
He added, however, that even with the hot IPO market, there are still plenty of venture firms awaiting liquidity for prior investments.
What's more, the number of companies at any stage of maturity that received venture funding for the first time rose 8 percent compared with the previous quarter.
There again, the software industry ruled the roost: Nearly half the companies landing first-time investments in the third quarter were in software.
For investors, it comes down to simple math, McCaffrey said: "There's such energy in the software sector now, it's hard to ignore." Even at the expense of other sectors.
Contact Peter Delevett at 408-271-3638. Follow him at Twitter.com/mercwiretap.
To read the full report online, go to www.pwcmoneytree.com.