4 Top Trends in Venture Capital Today
For those wanting a quick update on the US venture capital industry, here are 4 Top Trends:
1. Industry as a Whole: In January of 2010 the US Venture Capital industry’s 10-year returns turned negative (2000-2010). Estimates range from -0.92% to -7% for the ten year period. In 2009 alone the US Venture Capital Index returned 2.95%, significantly lower than Barclay’s government and corporate bond index at 4.52%. In 2009 the Dow Jones Industrial Average returned 22.68%, the S&P 500 returned 26.46% and the Nasdaq returned 43.89%, making venture capital the lowest performing investment class last year amongst such peers.
Bottom Line – The VC industry is struggling to rebound from a tough decade of poor aggregate returns.
2. Fund-raising by VC Firms: VCs raised $3.6 billion in the first quarter of 2010. This is a 31% decline in dollar commitments from the first quarter of 2009. The raw number of investors (LPs) contributing to VC funds also declined by 44% in the first quarter of 2010. Investments in follow-on VC funds far exceeded investments in new funds, a trend that continues to grow.
Bottom Line – It’s getting harder for VCs to raise money (especially for new funds).
3. Areas of VC Investment: The top areas of investment in the first quarter of 2010 were biotech (17.45% of all deals), software (14.41%) and industrial/energy (14.26%). The lowest areas of investment were networking and equipment (1.45%), retailing/distribution (0.87%) and healthcare services (0.38%).
Bottom Line – VCs are targeting some industries far more than others.
4. VC Exits: The total number of VC exits has fallen year-over-year since 2007, however the first quarter of 2010 enjoyed a resurgence of 9 IPOs and 111 M&A transactions. M&A transactions constitute more than 80% of all exits (versus IPOs), a gap that continues to widen. The average VC-backed M&A transaction in Q1 2010 was $180.2 million, a 21% increase from the average M&A deal size in 2009.
Bottom Line – The VC exit market is showing early signs of promise in 2010. The gross majority of exits continue to be through M&A (a trend that has increased).
Sources:
- Cambridge Associates LLC, US Venture Capital Index And Selected Benchmark Statistics; Non-Marketable Alternative Assets, December 31, 2009.
- PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report, Data: Thomson Reuters (Q1 2010).
- PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report, Data: Thomson Reuters, Total U.S. Investments by Year Q1 1995 – Q1 2010, (April 16, 2010).
- PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report, Data: Thomson Reugers, Investments by Industry / Q1 2010, https://www.pwcmoneytree.com/MTPublic/ns/nav.jsp?page=industry (accessed May 21, 2010).
- Thomson Reuters/National Venture Capital Association, Venture Capital Fundraising Experiences a Slow Start to 2010; First Quarter Shows Decline in Number of Funds and Dollars Raised (April 12, 2010).
- Thomson Reuters/National Venture Capital Association, Venture-Backed Exit Activity Shows Improved Signs of Life in Q1 2010; All-time Record for Venture-backed M&A Exits; Nearly All Venture-backed IPOs Trading Above Offer Price, (April 1, 2010).
Looks like it’s been a tough few years for VCs! Glad to see that Q1 this year is starting to turn things around. As an entrepreneur, the downstream effects of VCs having problems have been very challenging – tight fundraising conditions.
It’s nice to see some signs of life in 2010. Hopefully the recent Greek crisis, financial regulation uncertainty and other factors in the stock market won’t reverse the trend. A lot of good companies have been waiting for the exit market to thaw. There are a glut of companies that probably would have been bought or IPO years ago, except that exit conditions weren’t right so everything got put on hold. If things continue to improve there should be another small landslide of exits like in Q1.
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It’s much more difficult to start a new fund, if not impossible, nowdays. Even most of those “new” funds that did manage to get LPs to invest had experienced veteran GPs in them. It’s just too hard to raise capital in this climate and I don’t see that changing any time soon. I hope it changes but can’t see how.
There is a large consolidation of the VC industry where fewer funds are getting larger amounts, and other funds are getting nothing. The overall industry has been shrinking in terms of invested capital, but the consolidation is also happening. This is bad for startups needing seed capital because fewer funds with larger sums will tend to want to do bigger deals, and later stage deals.