Software is eating the world, and venture capital is feasting on older software

Marc Andreesen once said that “software is eating the world,” and this past quarter of venture capital investment sure seems to back that statement up.

PricewaterhouseCoopers and the National Venture Capital Association (NVCA) just released their MoneyTree Report based on data from Thomson Reuters for 2014’s first quarter. Their data tell us that venture capitalists believe that software is a huge deal right now — as big a deal as it was in 2000! — and that they’re staying close to these companies that have shown promise as the bulk of investments has moved from earlier stage companies to those in expansion and growth phases.

Software investments reached $4 billion last quarter (first time since 2000’s fourth quarter), making up 42 percent of total dollars invested and 44 percent of total deals made in 2014’s first quarter. They also increased by 39 percent since the previous quarter.

“Context is everything, and when you consider the context behind the numbers, you start to understand why there was a shift in the first quarter of 2014. Seed and early stage financing numbers are down from the previous quarter, but expansion stage dollars invested are up 34 percent. This was to be expected when you consider the domination by seed and early stage deals in 2012 and 2013,” said Bobby Franklin, the president and chief executive of NVCA.

“Because these companies are now moving to the next stage of their maturing process, the investment rounds tend to be bigger, which explains why the numbers are trending toward the later stages of the investment calendar. To be sure, the spring thaw of the exit markets is providing some firms with new life, but overall capital remains constrained for most venture capital firms,” he added.

When looking at the numbers and how they split into stages of investment, they support this: Seed- and early-stage deals made up only 52 percent of deals this quarter, as compared to 55 percent in 2013’s fourth quarter. However, while the average size of seed-stage deals dropped, going from $5 million to $3 million, the average size of early-stage deals increased from $5.4 million to $6.4 million.

In turn, expansion and later-stage deals went up in all aspects. You can see the complete numbers in the official press release online.

Second behind software was biotechnology, with $1.1 billion split into 112 deals, a 23 percent decrease in dollars and 21 percent in deals from the previous quarter. Medical devices and equipment deals fell by 37 percent, although they rose by 28 percent in dollars. Combined, these two sectors fell 10 percent in dollars and 28 percent in number of deals.

Yet the health-related sectors still seem to be in good health (pun absolutely intended), as we saw at this year’s South by Southwest Interactive festival. There’s also been a lot of interest in health and fitness-related companies that are actually software, such as fitness-tracking apps. Just in the past few weeks, we’ve seen companies such as Wellframe and Omada Health get funding, and health care venture firm Foresite Capital raised a $100 million fund.

The numbers about first-time financing, defined as “companies receiving venture capital for the first time,” saw some changes, mostly decreases. Total dollars dropped by 25 percent, and the number of companies fell 24 percent. This accounted for only 13 percent of all dollars, which is the smallest percentage ever in the survey’s history.

Somewhat surprisingly, given the shifts in seed and early stage investments, the average deal size remained the same ($4.4 million). But unsurprisingly, seed and early-stage companies raised the bulk of first-time investments, with 78 percent of total dollars and 82 percent of the number of deals.

Overall, the survey’s data is supporting many of the trends and narratives we’ve been observing, though the simmering of health-related industries is likely still too young to have already impacted venture capital investment. Angel investment presence is also not accounted for here and could otherwise be painting a very different picture in terms of what industries are attracting the most attention from all investors.