Tag Archives: Venture capital

Venture Dollars Up for Quarter, Down for Year

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The optimist points to increased venture capital deals and dollar amounts in the second quarter of 2012 compared to the first three months of the year. The pessimist notes that both the second-quarter and first-half numbers for 2012 are lower than those figures in 2011.

The brief recap: January through June 2012 saw 1,707 deals worth $13.1 billion; for the same time period in 2011, it was 1,942 deals with a value of $14.7 billion.

Further numbers and analysis from one of the longest names/reports on record: The MoneyTree™ Report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters.

The number of Early stage deals reached the highest quarterly total since Q1 2001, with $2.1 billion going into 410 deals, an 18 percent increase in dollars and a 28 percent increase in deals from the prior quarter. The Internet-specific sector also saw increases during the second quarter, rising 22 percent in dollars and 31 percent in deals from the prior quarter to $1.8 billion going into 261 deals in Q2.  The Life Sciences sector (Biotechnology and Medical Devices), however, experienced a decline in funding in the second quarter, dropping 9 percent in dollars and 6 percent in deals from the prior quarter to $1.4 billion going into 174 deals in Q2.

“The concentration of venture capital dollars in the hands of fewer firms will increasingly dictate the flow of investment,” said Mark Heesen, president of the NVCA. “Currently, this translates into more funding for IT start-ups and less capital available for life sciences and clean technology.  We hope to see this investment mix rebalance over time as the start-up ecosystem is better served with more diversity, not less.  Additionally, we continue to watch the early stage and first time financing numbers as they are critical to the U.S. innovation pipeline.  We are encouraged that these numbers were stronger this quarter and hope that this signals an ongoing commitment on behalf of venture firms to make these longer term, breakthrough investments.”

“If funding levels in the second half of the year remain consistent with the first half of the year, VC investing in 2012 will fall short of the nearly $30 billion invested in 2011 but will exceed the $23 billion invested in 2010,” remarked Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC US.  “Software and Internet companies continue to be attractive industries for VCs since most of these companies tend to be capital efficient and don’t require large amounts of capital to operate.  VCs also find the potential for profitable liquidity events to be attractive for these companies.  On the contrary, given the regulatory challenges currently impacting the Life Sciences industry and the amount of capital required to fund these companies, it’s no surprise that investments in this industry have declined for the fourth consecutive quarter.”

The Software industry received the highest level of funding for all industries with $2.3 billion invested during the second quarter of 2012, which is the highest investment total for the sector since the second quarter of 2001.  This level of investment represents a 38 percent increase in dollars, compared to $1.7 billion invested in the first quarter.  The Software industry also had the most deals completed in Q2 with 290 rounds, which represents a 16 percent increase from the 251 rounds completed in the first quarter of 2012.

Life Sciences investing declined for the fourth consecutive quarter, most notably in the Biotechnology sector where $697 million went into 90 deals, representing the lowest quarterly total for the industry since the first quarter of 2003. 

Seed stage investments rose 33 percent in dollars and 15 percent in deals with $199 million invested into 63 deals in the second quarter. Early stage investments also rose, climbing 18 percent in dollars and 28 percent in deals with $2.1 billion going into 410 deals, the largest quarterly deal total since the first quarter of 2001.  

First-time financing (companies receiving venture capital for the first time) dollars increased 24 percent to $1.1 billion in Q2, and the number of deals rose 27 percent to 282 deals in the second quarter.   

Venture Capital Update: It’s Up

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What’s going on in the venture capital world and where does Indiana rank compared to other states? We’ll let the experts provide the analysis (below). As far as Indiana’s status, the 14 deals in 2011 (ranking 26th among the states) were similar to previous years; the nearly $178 million invested (20th ranking), however, exceeded recent trends. In other words, we had bigger deals in 2011.

The State Science &Technology Institute offers the following on a national level:

U.S. venture capital activity continued to rebound in 2011, with total investment dollars reaching levels similar to venture capital activity before the late-2008 drop, according to the latest data from the National Venture Capital Association (NVCA) and PricewaterhouseCoopers (PWC) Moneytree survey. Venture capitalists invested $28.4 billion last year in the U.S., up 30.3 percent over 2010. The NVCA/PWC announcement ranks 2011 the third highest year for investment in the past decade. Venture deals, however, grew by only 12.1 percent, stemming from higher valuations and continued support for portfolio companies.

Early stage investment activity grew substantially last year, while seed stage investment declined. VCs invested $8.3 billion in 1,414 early stage companies, an increase of 47 percent in terms of dollars and a 16 percent increase in deals over the previous year. Early stage investments represented about 29 percent of all venture dollars and 38 percent of deals, a modest increase over 2010. Seed stage investments, however, declined by 48 percent in terms of dollars to $919 million. Seed stage deals remained steady at 396. These numbers indicate that even though the overall trend in 2011 suggest a preference for larger deals, seed stage deals experienced a decline in average size.

Most states shared in the increase in venture activity last year. Among 2010’s top ten states for venture dollars, only North Carolina and Washington had decreases in activity in 2011. The decline caused North Carolina to drop out of the top ten for the year, replaced by Virginia where venture dollars increased by 61.8 percent to $607.6 million. California, which was the recipient of 51 percent of all venture dollars last year, experienced a 32.1 percent increase in investment.

View SSTI charts on dollars invested and deals.

Venturing Along the Capital Trail

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That headline is a cute way of saying "who are the recipients of venture capital?" CB Insights, a New York-based services firm for the financial industry, tried to answer that question in a recent study. You can sign up for free to get the full report, but I found this analysis from the State Science & Technology Institute provided a good overview.

 A CB Insights’ report on the "human capital" of venture-backed Internet companies finds that vast majority of company founders are white. They also tend to be between 35 and 44 years old, male and have MBAs.

When venture capitalists are asked the most important factor in choosing a company for a deal, they often say that the founder or team weighs heaviest in their decisions. CB Insights drills down into this human element by providing data on the founders of Internet companies that received venture capital in the first half of 2010. The study includes data on race, age and experience, the number of founders per company, gender and the educational background/pedigree of the founders. It also provides specific data on deals in California, Massachusetts and New York.

Within the 165 deals tracked in the study, 87 percent of early stage, venture-backed Internet startup founders were white, with 83 percent of entire founding teams being all white. Only 77 percent of the general U.S. population is white. Asian founders represented 12 percent of founders, while making up 4 percent of the U.S. population. The percentage of Asian founders was larger in California, and their companies tended to receive larger investments. Black founders accounted for only 1 percent of company founders, while Native Americans and "other" represented less than one percent.

The founders in the study were overwhelmingly male. Across the country, 92 percent of founders were male and 86 percent of teams were all male. Massachusetts had the highest percentage of female founders with 27 percent. All-male and all-female teams received similar levels of funding, but mixed teams received substantially more.

Almost half of the founding teams had average ages between 35 and 44. Teams in the 26-34 age range, however, tended to receive more capital. Massachusetts favored somewhat older teams, New York favored younger teams, and California teams fell in the middle. Nationally, 51 percent of founders hold a Master’s or PhD, but two-thirds of all teams had at least one person with an advanced degree. In New York, founders with only an undergraduate degree actually tended to raise more capital. Cornell, Stanford and Harvard produced the most founders with undergraduate degrees. Harvard, Stanford and MIT’s graduate programs generated the most founders with advanced degrees. About 37 percent of companies had one founder, 40 percent had two, 19 percent had three, and 4 percent had four partners.

While providing an interesting snapshot of the founders who received funding in the first half of 2010, there are limits on the conclusions that can be drawn from the CB Insights report. It focuses exclusively on venture-backed Internet companies, and, since it is the first in a series of reports, no trend data is yet available. Also, without data on who is seeking for venture funding, the report does not reveal much about the preferences of venture firms. It is clear, however, that the population of venture-backed founders included in the study does not reflect the diversity of the U.S. population.

Study Ventures Into Capital World

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The Silicon Valley and Route 128 have long been identified as the homes of venture capital. For the unitiated, that’s the San Francisco and Boston areas. Throw New York in the mix and the three regions are home to nearly half of all VC firms and a like number of VC-backed companies.

The State Science & Technology Institute reviews some recent research that says what appears to be bad news (it is in some respects) for other parts of the country has some silver linings for investors.

Venture firms exhibit a strong local bias, according to the study. A firm is almost six times more likely to invest in a local firm, controlling for other factors. The authors note, however, that out-of-region investments have a higher success rate than in-region investments. One explanation is that firms have a higher barrier to investing out of their home region and tend to restrict their investments to low-risk and higher-yield opportunities.

Despite the greater likelihood of success in out-of-region investments, firms based in venture capital centers outperform firms in other locales. These regions have a greater number of opportunities, pools of talented employees and benefit from knowledge spillovers. The authors suggest that this concentration may be a rational allocation of resources and make sense for investors.

The researchers advise that anything a region can do to increase the number of successful venture-backed investments in a region can greatly increase the likelihood of future deals. Once a region has experienced a few successes, they are much more likely to become the home of branch offices, which in turn are prone to invest locally. Also, once a firm has invested in an out-of-region area, they are much more likely to invest in that region in the future.

Indiana has certainly seen increased outside investment and realized some success stories. More of each will lead to … more of each.
 

Survey: Asia, India in Line for More VC Dollars

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Venture capital has long been concentrated in California and Massachusetts. No news there. Many people, however, will cite improved efforts in recent years by Indiana private and public sector leaders to attract those VC dollars.

The 2009 Global Venture Capital Survey, though, indicates that job might become a little more difficult in coming years. Why?

  • More than half of venture capitalists are now investing outside their home country
  • Fifty-four percent of investors anticipate working with additional international partners in the next three years
  • Asked where their dollars are most likely to go over those 36 months, the top answers were Asia, 50%; India, 43%; and South America, 36%. Only 17% forecast increased U.S. investment

There is still room for states to set themselves apart. Nearly 60% responded that government can play a key role by establishing favorable tax policies. Fifty percent noted that more support for entrepreneurial activity is also important.

On the other hand, maybe more international dollars will find their way here. Another very good reason for the U.S. to avoid protectionist policies that shut the door on international trade and investment.

Research: Distance Impacts Structure of VC Funding

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What do we know about venture capital — other than there isn’t quite as much in play today as in recent years?

In a recently compiled list of the most active VC firms in 2008, 40 were located in the Silicon Valley and San Francisco. Another 18 of the firms doing the most business were in Massachusetts. That distribution is nothing new.

Whether that fact makes it more difficult for Indiana and other Midwest companies to obtain funding is an age-old question. Some say it is a distinct disadvantage for Hoosiers, while others contend good ideas will find the money no matter the location.

Research from Xuan Tian, an assistant professor of finance at IU’s Kelley School of Business, finds that if companies do receive funds, the overall level is not impacted by distance. The structure of the financing, however, is subject to variances based on proximity.

The State Science & Technology Institute summarizes it this way:

Companies located farther from their venture investors receive more frequent rounds of financing with lower cash amounts per round. According to the study, this difference is attributable to the higher cost of monitoring companies that are farther away.

Investee companies that are located near their investors are able to meet with them regularly, minimizing the risk to the investor and the cost of gathering information.

Tian argues that monitoring and the staging of funding rounds are substitutes for each other. With the low-cost monitoring that is possible with nearby firms, venture firms can afford the larger risks associated with large, infrequent cash infusions. The cost of monitoring more distant companies means that venture firms are less willing to take those risks. More frequent funding rounds give investors the option of dropping a company that is not meeting its goals, with fewer losses.

IPOs a Good Sign

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How about some good financial news? Really! I’m not kidding.

No, it doesn’t mean this current economic downturn is over — but it is a step in the right direction. Last week, two initial public offerings for technology-based companies got off to a positive start. The companies (OpenTable, an online restaurant reservation service; and SolarWinds, which makes network management software) could be harbingers of good things to come.

Venture capitalists have seen little, if any, recent return on their investments. Only six venture-supported start-up companies went public last year. That was the lowest since 1977 and a dramatic freefall from the 86 IPOs in 2007 and the 100-plus prior to the bursting of the technology bubble.

Experts say the changed financial landscape will prevent a return to the IPO glory days of the past decade. Why? New banking and accounting rules make it more difficult to go public; big banks bought many of the smaller banks that were active in taking start-ups public; and with additional pressures, fewer banks and investors are spending time researching the smaller companies.

But those experts would like to eventually return to an average of 50 IPOs a year. And this could be a start in the right direction.

Spreading Wings: Financial Resources Still Available for Expanding, Start-up Businesses

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The consensus appears to be that those looking to start or expand their business can’t find the necessary financial resources. As is often the case, perception does not equal reality.

Angel investors are only one part of the financing mix. But in a 2008 analysis from the University of New Hampshire’s Center for Venture Research, the State Science & Technology Institute reports that while fewer dollars flowed to entrepreneurs last year, the number of deals held steady.

Some of the highlights:

  • Investment fell 26.2% to $19.2 billion
  • Deals declined only 2.9% and the number of individual investors actually increased
  • Forty-five percent of angel deals involved companies at the seed or start-up phase, an increase from 39% in 2007
  • Health care/medical devices and equipment passed software as the most popular investment category
  • 10% of companies reviewed by angel investors received funds, continuing a downward trend from 23% acceptance in 2005

The latter figure, however, has little to do with the economy. What it shows, and what should be taken from the numbers, is that the best ideas and organizations can still have their angel aspirations fulfilled. Isn’t that the way it should be?

SSTI: Save SBIR Now

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The State Science & Technology Institute (SSTI) is a leading provider of tech-related news and information. Its most recent issue offers a straight-to-the-point editorial about a lack of action in Congress that could prove devastating to small businesses across the country.

Inconceivable? Unconscionable? Inexcusable? Which word best conveys what is happening to the Small Business Innovation Research (SBIR) Program? Perhaps all of them. The SBIR program will expire March 20 unless Congress acts before that date.

No SBIR-related legislation has been considered by either chamber of Congress since the current session began in early January, and without action by Congress by March 20, the program expires. SBIR could be attached to some other bill before the deadline, but there is no indication at this point that that is going to occur.

It is inconceivable that one of the most successful federal programs to support the commercialization of innovation will be allowed to expire at the same time the country is desperately seeking investments to prepare the nation for the next economy. As SSTI has reported, significant portions of the Recovery Act are focused on investing in the future. Green technologies. Alternative energy. Information and communication technologies. Smart tech. SBIR should play an important role in that – just as it has supported the early development of a number of important technologies and tens of thousands of companies for the past 25 years.

It is unconscionable and inexcusable to think that a federal program would be allowed to expire that has proven to be effective. In addition to the hundreds of anecdotal success stories and profit statements from small businesses, a multimillion dollar independent assessment conducted by the National Academies of Science found SBIR to be effective.

The battle over inclusion of venture-backed biotech firms in SBIR derailed passage of an SBIR reauthorization bill last year. Both proponents and opponents were unwilling to compromise, and it seems both sides will lose now.

SBIR has proven to be a valuable screening tool for venture capitalists across many disciplines, including biotech. Compared to other small businesses, most SBIR winners are worthy of a closer look when prospecting for firms to add to an equity portfolio. Is VC eligibility going to prove to be the deal-breaker for SBIR’s continued existence?

SBIR, through its competitive application process and market-driven need for the resulting innovations to be commercialized, costs less than $3 billion a year and supports thousands of small businesses across the country and several thousands more high-wage jobs for some of the nation’s smartest entrepreneurs.

This one seems pretty simple. SBIR reauthorization should be part of the economy’s solution.

Mark Cuban School of Business – Stimulus 101

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Controversial billionaire/Dallas Mavericks owner and Indiana University graduate Mark Cuban has decided to jumpstart the economy himself. Based upon his contention that entrepreneurs will be the keys to America rising above its economic doldrums, he’s offering to fund some worthwhile ideas. Will your idea make the cut?:

You must post your business plan here on my blog where I expect other people can and will comment on it. I also expect that other people will steal the idea and use it elsewhere. That is the idea. Call this an open source funding environment.

If its a good idea and worth funding, we want it replicated elsewhere. The idea is not just to help you, but to figure out how to help the economy through hard work and ingenuity. If you come up with the idea and get funding, you have a head start. If you execute better than others, you could possibly make money at it. As you will see from the rules below, these are going to be businesses that are mostly driven by sweat equity.

I will invest money in businesses presented here on this blog. No minimum, no maximum, but a very specific set of rules. Here they are:

1. It can be an existing business or a start up.
2. It can not be a business that generates any revenue from advertising. Why ? Because I want this to be a business where you sell something and get paid for it. Thats the only way to get and stay profitable in such a short period of time.
3. It MUST BE CASH FLOW BREAK EVEN within 60 days
4. It must be profitable within 90 days.
5. Funding will be on a monthly basis. If you dont make your numbers, the funding stops
6. You must demonstrate as part of your plan that you sell your product or service for more than what it costs you to produce, fully encumbered
7. Everyone must work. The organization is completely flat. There are no employees reporting to managers. There is the founder/owners and everyone else
8.  You must post your business plan here, or you can post it on slideshare.com , scribd.com or google docs, all completely public for anyone to see and/or download
9. I make no promises that if your business is profitable, that I will invest more money. Once you get the initial funding you are on your own
10. I will make no promises that I will be available to offer help. If I want to , I will. If not, I wont.
11. If you do get money, it goes into a bank that I specify, and I have the ability to watch the funds flow and the opportunity to require that I cosign any outflows.
12. In your business plan , make sure to specify how much equity I will receive or how I will get a return on my money.
13. No mult-level marketing programs (added 2/10/09 1pm)

No word yet if automatic funding will be offered to those willing to openly criticize NBA Commish David Stern.