United States

Synopsis of 2012 Venture Capital Trends

INVESTMENT INDUSTRY INSIGHTS  | 

Overview

The venture capital industry is a major contributor to the U.S. economy in multiple aspects. Its importance to the U.S. economy cannot be ignored. Venture capitalists invest in startup companies that drive technological and service innovations in the U.S. They assume more risk and partner with entrepreneurs to bring breakthrough ideas and technologies to the marketplace.

Based on the latest survey conducted by the National Venture Capital Association (NVCA), although the investment in venture-backed companies equates to approximately 0.1 percent to 0.2 percent of the U.S. GDP, these companies employed approximately 11 percent of the total U.S. private sector workforce and generated revenue of approximately 21 percent of the U.S. GDP. Looking forward, venture capital’s impact on the U.S. economy will grow even larger as many of the fastest growing venture-backed companies go public.

In 1970, there were 93 venture-backed deals aggregating $0.10 billion. In 2000, there was a record of 6,420 deals raising $99.2 billion. This has tapered down to 3,834 deals raising $29.5 billion in 2011.

Fundraising by venture capital funds

In the first half of 2012, 82 venture capital funds raised $11.2 billion compared to 92 VC funds that raised $10.2 billion in the first half of 2011. This marks an increase of 9.8 percent in dollar commitments and a 10.9 percent decline in the number of funds in the first half of 2012 compared to the corresponding period in 2011. The top five funds accounted for approximately 80 percent of the total fundraising in the first half of 2012, as the number of funds that raised money during the period fell to its lowest levels since the third quarter of 2009. This indicates that there is a heavy concentration of dollars in the hands of a few large firms.

New funds vs. follow-on funds

There were 22 new funds and 65 follow-on funds launched in the first half of 2012, compared to 29 new funds and 63 follow-on funds in first half of 2011. Thus, although there is a slight increase in the new funds launched in 2012, the number of follow-on funds remained consistent with the prior year.

Funding by industry

On an overall basis, the total dollar amount invested across various industries in the first half of 2012 was $13.1 billion, which was lower by $1.65 billion or 11 percent compared to the same period in 2011. Also, there were 1,707 deals in the first half of 2012 which was lower by 12 percent compared to 2011.

There has been a shift in the industry trend in 2012 where the appetite for investing in life sciences companies reduced by over 25 percent compared to 2011. In comparison, software companies received additional funding of 36 percent during the same time period.

Funding by stage of development

Based on investing of the funds across various stages of development, 64 percent of the total funding was made in early stage and expansion stage companies in the first half of 2012, compared to 59 percent in 2011. Investing in later stage companies comprised 34 percent of the total funding in the first half of 2012 compared to 37 percent in 2011. Thus, the focus of venture capitalists in 2012 was looking for more opportunities in the early and expansion stage companies compared to 2011.

First-time financing

Companies in the software industry received the most first-time financing of 38 percent of the total funding in the first half of 2012 compared to 27 percent in the corresponding period in 2011. First-time financing in the internet service industry and the media and entertainment industry was flat at 12 percent and 10 percent respectively compared to 2011. The life sciences industry experienced a slight drop of 5 percent in first-time financing in the first half of 2012 at 14 percent compared to 19 percent in the corresponding period in 2011. The results are consistent with the earlier conclusion that venture capitalists appear to have found a new appetite for companies in the software industry compared to the life sciences industry.

Early stage companies received the bulk of first-time financing in the first half of 2012, garnering 52 percent of the total dollars invested and 63 percent of total deals, compared to 43 percent and 49 percent, respectively, in the first half of 2011. The financing in the expansion stage companies was constant at 18 percent of the total financing in both 2012 and 2011. Whereas seed stage companies received 12 percent of the total financing in the first half of 2012 compared to 19 percent in the first half of 2011, and later stage companies received 18 percent of the total financing in the first half of 2012 compared to 21 percent in the first half of 2011. The results are consistent with the earlier assessment that venture capitalists seem to be more focused on investing in early stage and expansion stage companies in 2012 compared to investing in seed stage and later stage companies.

Venture capital exits

There was a reduction in the volume of IPO exits by 16.6 percent in the first half of 2012 compared to the corresponding period in 2011, there was an increase in the dollar amount raised, by 172 percent, mainly due to Facebook’s IPO. Removing this outlier resulted in a reduction in the total dollar amount raised by $4.3 billion.

Conclusion

Venture capital-backed investments have reduced both in dollar value (11 percent) and the number of deals (12 percent) in the first half of 2012 compared to the same period in 2011. This is due to several shifts occurring in the venture capital industry, which continues to consolidate, and where large venture capital firms have a heavy concentration of dollars, leading to fewer dollars invested in fewer deals. However, with the IPO market improving compared to the prior year, it is expected that venture capital firms will be investing in more deals in the near future.

By Hitesh P. Kothari, CFA, CPA, CA, director, 212.372.1087 and John T. Hague, partner, McGladrey LLP, 312.634.3354

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