Software firms grab the venture money

Software companies captured a 28 percent increase in venture funding during the third quarter, while virtually all other industry sectors posted across-the-board declines, according to a venture capital survey released Friday.

Investments in software companies rose to $1.2 billion in the quarter, compared with $952.4 million in the previous quarter, according to a joint survey by research firm VentureOne and professional services giant Ernst & Young.

"Software is a strong cornerstone in (information technology) venture investing, whereas telecommunications has fallen out of favor," said John Gabbert, vice president of Worldwide Research at VentureOne.

Venture investments overall, however, are down significantly. Investments fell 24 percent sequentially to $3.9 billion in the quarter--marking the lowest level in four years.

Despite the massive pullback in funding, companies that develop business-applications software posted a 49 percent sequential increase to $391 million in the quarter, while companies that make connectivity and communications software tools received a 24 percent increase to $307 million.

"The growth in software investment can be attributed to those sectors that are the current focus of government and corporate spending," said Bryan Pearce, venture capital advisory group leader for Ernst & Young. "These include security...as well as data center management and enterprise application integrations, which are among the few areas where major corporations are increasing IT spending."

The software sector, and to a lesser degree the information services and semiconductor industries, helped stem a massive erosion in IT investments. The technology industry received $2.5 billion in venture funding during the third quarter, slightly down from $2.54 billion in the previous quarter.

Information services rose 18 percent to $94.4 million in the quarter, compared with the previous quarter. And the semiconductor industry climbed nearly 8 percent to $369.6 million over the second quarter.

But the communications and networking sector dropped 26.5 percent to $633.4 million in the third quarter, while the electronics and computer hardware sectors fell 39 percent sequentially to $187.2 million.