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First Half 2006 Digital Media VC Assessment

According to Rutberg & Company, venture capital activity in digital media is, by all accounts, robust. During the first six months of 2006, private digital media companies raised $2.4 billion of venture capital through 278 financings.

This activity nearly matches that of the full year 2005, in which $2.6 billion was raised through 313 financings. Notably, 245 venture capital firms announced two or more digital media investments during the eighteen month period between January, 2005, and June, 2006.

The robust activity indicated by the financing totals is consistent with their conversations with entrepreneurs and investors. On an anecdotal basis, for example, Rutberg notes the formation by numerous venture firms of digital media-specific strategies, practices, and portfolios over the past two years. Although raising capital is never easy, they believe the current environment is healthy for private digital media companies.

The M&A market remained steady in 1H06 with 181 transactions announced during the period, as compared to 183 and 185 in 1H05 and 2H05, respectively. Further, the IPO market for digital media companies remains muted. During the first half of 2006, only 6 IPOs were filed and 6 were priced in the industry, as compared to 5 filed and 19 priced in 2005. Rutberg doesn't find visibility toward a substantial change in the dynamics of the IPO market in the near-term. As such, they believe M&A remains the far more likely exit scenario for private equity investors.

Overall, they note that venture capital activity has increased substantially over the previous 18 months, while M&A activity has remained steady over this same period. Several venture investors in their conversations have referred to this situation as a "bubble without an exit," indicating a concern and frustration over the high investment levels but low exit numbers. Rutberg believes that this situation may be, at least partly, due to the early stage of digital media as an industry, and that there are underlying, positive indicators for future M&A activity in the industry.

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