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Venture Capital Articles

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The Venture Capital World Keeps Getting Smaller

May 2nd, 2013 ::

By Maria Valdez Haubrich

Are you seeking venture capital to grow your small business? Then you’ll find a little good news, but mostly bad news, in the continued consolidation of U.S. venture capital firms. Venture capital firms raised $4.1 billion from 35 funds in the first quarter of 2013, according to the latest report from Thomson Reuters and the National Venture Capital Association (NVCA).

The good news: That’s an increase of 22 percent compared to the level of dollar commitments raised during the fourth quarter of 2012. The bad news? It’s a 14 percent decrease in terms of the number of funds.

Measured in terms of the number of funds, the first quarter of 2013 was the slowest quarter for venture capital fundraising since the third quarter of 2003. In addition, the majority of the total fundraising (57 percent) came from the top five venture capital funds, three of which are based in Massachusetts (Battery Ventures X, Third Rock Ventures III and Spark Capital IV).

“The first quarter venture fundraising activity really demonstrates the contracting and consolidating nature” of venture capital today, John Taylor, head of research for NVCA, said in announcing the report’s results. “The lack of a strong exit market is keeping many funds that would like to be raising money away from investors until they can demonstrate a track record. This dynamic is keeping the number of funds raised low.”

The trend is going to continue, Taylor says, warning entrepreneurs they should be prepared for fewer funds in 2013, and noting that this will ultimately decrease investment levels from traditional firms.

The NVCA reports that there were 30 follow-on funds and five new funds raised during the first quarter of 2013, for a 6-to-1 ratio of follow-on to new funds. (A “new” fund is defined as the first fund at a newly established venture capital firm.) Based on dollars raised, follow-on funds account for 98 percent of total dollar commitments made during the first quarter of 2013. This continues a trend that’s been going on during the past five years, in which time follow-on fund dollars have accounted for a whopping 92 percent of total venture capital fundraising.

Image by Flickr user tuppus (Creative Commons)

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Bad News for Small Business: VC Investments Decline

November 15th, 2012 ::

By Maria Valdez Haubrich

Recently, we posted here about the growth in angel capital investments. Now, there’s some not-so-good news for small businesses about venture capital. The most recent MoneyTree survey from PricewaterhouseCoopers and the National Venture Capital Association reports that in the third quarter of 2012, VC investments shrunk both in terms of overall dollars (down by 11 percent from the second quarter of 2012) and in terms of deal volume (down by 5 percent from the second quarter of 2012).

VC dollars and deals also declined year over year. What’s behind the shrinkage? PWC and the NCVA say that venture capitalists are exhibiting extreme caution with the capital they have available. Instead of making new investments, they’re focusing on the companies that are already in their portfolios. Compounding the problem, there are fewer new venture funds, which is cutting into the amount of capital that can be invested.

Of course, the bad news may not affect you if your small business is in an industry that finds it easier than average to attract venture capital. Here’s a closer look:

  • As of Q3 2012, software companies were still the most popular type of VC investment, accounting for $2.1 billion invested in 304 deals. (That’s still a 12 percent drop from Q2 2012, however).
  • Life sciences (which includes biotechnology and medical devices) investing increased in terms of dollars but declined in deal volume compared to Q2 2012.
  • Internet-specific investing (companies whose business model depends on the Internet, regardless of industry) declined by 12 percent in dollars and 8 percent in deal volume compared to Q2 2012.
  • The clean technology sector (alternative energy, pollution and recycling, power supplies and conservation) had a 20 percent decrease in dollars but a 2 percent increase in deal volume.
  • Financial services, healthcare services, business products and services, and retailing businesses saw increasing dollar amounts invested in Q3 compared to Q2.
  • In contrast, companies in the media and entertainment, semiconductors, telecommunications and IT services sectors all saw a decline.
  • Companies in the software, media and entertainment, and IT services industries received the most first-time rounds in Q3 2012.

Your industry isn’t the only thing that matters when you’re looking for VC investments. Where your business is located matters more than you might want to think. Over half (58 percent) of VC funding in Q3 2012 went to businesses in California, Massachusetts and New York.

Image by Flickr user Horia Varlan (Creative Commons)

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Where Are VCs Investing Now?

February 14th, 2012 ::

By Karen Axelton

Facebook’s recent IPO may be getting all the attention, but social media isn’t the only area where investors are putting their money. When it comes to venture capitalists, Information Week reports, VCs’ favorite place to invest in 2011 was the health IT sector. Specifically, medical software and information services attracted $633 million in VC investment in 2011–the most this sector has attracted since 2001, according to data from Dow Jones VentureSource.

DowJones data shows VC investment in health IT rose from $394 million in 2009 to $520 million in 2010. 2011 saw a 22 percent increase in dollars invested, along with a 26 percent increase in the total number of deals–from 68 in 2010 to 86 in 2011.

What’s behind the surge of interest in healthcare IT? The last three years have seen wider adoption of electronic health records, accelerated by President Obama’s federan incentives. And consumers’ and healthcare practitioners’ growing comfort with using the Internet, software and mobile devices to store, access and manage health-related data has attracted VCs’ attention.

And their interest in the health IT sector shows no sign of slowing, according to the most recent Venture View survey by Dow Jones VentureSource and the National Venture Capital Association. The poll of more than 500 venture capitalists in late 2011 found 61 percent predict investment in healthcare IT will rise in 2012.

While health IT is a rising star of healthcare VC investments, biopharmaceuticals was still the healthcare industry that got the most VC investment in 2011, with 302 deals at a total of $3.9 billion. However, compared to 2010, that figure represents a 6 percent decline in deals and flat dollar investment.

Medical devices came in second, with 290 deals in 2011 for a total of $3.3 billion. Although the number of deals declined slightly, investment dollars rose by more than 25 percent.

Where are VCs not investing? Perhaps due to uncertainty as to how healthcare reform will actually shake out, investment in healthcare services plummeted from $1.2 billion in 2010 to $541 million in 2011.

Overall, the Dow Jones VentureSource quarterly survey of VC investments in energy, consumer Web and IT, health, and electronics and computer hardware companies showed that total VC investments slowed in the last quarter of 2011, the year overall saw 3,209 deals for a total of $32.6 billion. That’s a 10 percent increase in capital raised and a 6 percent increase in the number of deals compared to 2010.

Image by Flickr user takomabibelot (Creative Commons)

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2011: A Good—and Bad—Year for Venture Capital

January 24th, 2012 ::

By Maria Valdez Haubrich

The fourth quarter 2011 data from the National Venture Capital Association is in and there is good news and bad news about the venture capital industry.

The good news is that the amount of money venture capital firms are investing is on the rise; the bad news is that the number of venture capital funds out there is declining. In the U.S., 38 venture capital funds raised a total of $5.6 billion in the fourth quarter of 2011, representing a dollar increase of 162 percent but a 41 percent drop in the number of funds compared to the third quarter of 2011. (In that quarter, 64 funds raised $2.1 billion.) This quarter marked the lowest number of funds raising money since the third quarter of 2009.

In all of 2011, U.S. venture capital fundraising totaled $18.17 billion from 169 funds. That’s a 32 percent increase by dollars compared to 2010, but the same number of funds.

“This past year we saw more venture capital money raised by essentially the same number of firms, a sign that consolidation within the industry is continuing,” said Mark Heesen, president of NVCA, in announcing the data. “We also continued to invest more money in companies than we raised from our investors. Both of these trends – if they continue — suggest that the level and breadth of venture investment is starting to recalibrate to reflect a concentration of capital in the hands of fewer investors. Our cottage industry is indeed getting smaller still and that will impact the startup ecosystem over time.”

How will this shakeout affect small businesses? Consolidation in financial industries generally makes it harder for smaller companies to get backing, as bigger funds with more dollars to invest are more likely to look for high returns and less likely to take risks on smaller firms without a high potential for ROI.

At the same time, a shakeout is also occurring in the IPO market. The NVCA recently reported that in 2011, 52 venture-backed companies went public, representing a value of $9.9 billion. That’s a 31 percent decrease in volume, but a 41 percent increase in dollar value compared to the previous year.

In other words, with both venture capital investment and venture-backed IPOs, the trend is toward fewer and bigger players, meaning bigger—but fewer—deals.

Image by Flickr user photosteve101 (Creative Commons)

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Small Biz Resource Tip: ChubbyBrain

November 24th, 2011 ::

ChubbyBrain

If you’re looking for funding for your business, you want to find a good fit with a lender. ChubbyBrain can help. ChubbyBrain is a funding recommendation engine that analyzes the funding history of venture capitalists, angel investors, financial institutions and grant providers to find those that best fit your business’s needs. It only takes about 5 minutes to input your business’s data; then the search engine uses your data to find your match. Best of all, it’s free. In addition to the search engine, ChubbyBrain offers guides to help small business owners navigate the world of getting financing.

 

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Posted in Capital Access, Raising Capital, Resources, Small Business, small business, Venture Capital | 1 Comment »

New Financing Option for Small Businesses: SBIC Impact Investment Initiative Launches

August 18th, 2011 ::

By Karen Axelton

Small businesses seeking capital in Michigan have a new source of options thanks to the Small Business Administration. The SBA last month announced that InvestMichigan! Mezzanine Fund will be the first licensed Impact Investment Fund in the SBA’s new Impact Investment Initiative. The $130 million venture capital fund will provide capital to businesses that are headquartered in Michigan, have a significant presence in Michigan or are in the process of expanding their operations in Michigan so they can grow and create jobs.

The InvestMichigan! fund is the first stage in a $1 billion commitment over five years through the SBA’s Impact Investment funds, part of the Obama administration’s Startup America initiative announced in January. Karen Mills, SBA Administrator, said Michigan was chosen as the launch state because of its economic struggles as well as opportunities.

Startup America is a White House initiative to bring together public and private organizations to help entrepreneurs. It will use the infrastructure of the SBA’s Small Business Investment Company Program (SBIC), which supplements private equity capital and long-term loan funds to help small businesses expand. In FY 2010, according to SBA data, the SBIC program provided $1.59 billion of financing to nearly 900 U.S. small businesses.

The Impact Investment Initiative is expected to put up to $1.5 billion into the hands of small businesses over the next five years. It will combine public and private funding for high-growth companies that generate not only a financial but also a “social” return. The program will focus on businesses in underserved markets or in sectors that have been defined as national priorities. Impact investments can be:

  • Place-based, targeting small businesses located in or employing residents of low or moderate income areas or economically distressed areas; or
  • Sector-based, targeting industry sectors that the Administration has identified as national priorities. (Currently only clean energy and education have been identified as priority sectors.)

The SBA will collaborate with private, institutional investors to identify impact investments and provide licensing and capital to fund managers who qualify to organize and operate an Impact Investment SBIC.

For more information on the Impact Investment Initiative, visit the SBA website.

Image by Flickr user TexasGOPVote (Creative Commons)

 

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Corporate VC Makes a Comeback

May 31st, 2011 ::

By Karen Axelton

Capital for small businesses has been hard to come by for the past few years, and venture capital has been especially so. But now a particular kind of VC—venture capital from corporations—may be making a comeback.

Writing in VentureBeat, venture capitalist Robert R. Ackerman, Jr., contends, “Corporations are seeing the light and reinvesting in venture capital” after a few dry years.

Ackerman cites some impressive figures. In 2010 corporations invested $1.9 billion in venture capital in the United States. That represents an increase of 33 percent from 2009 figures, and accounted for almost 9 percent of all VC investing in 2010, which Ackerman says is close to a record. In fact, he notes, last year corporate venture capitalists invested in 20 percent of all venture capital deals.

General Motors, Google, BMW and Verizon Communications are just some of the corporations getting involved in venture capital today.

Why are corporations suddenly getting back into VC? The answer has to do with small business. Corporations are recognizing small businesses as key drivers of innovation, and realize that small businesses are more efficient at using VC investments than are bigger ones.

The last big surge in corporate VC was during the dotcom boom of 1999-2000, Ackerman says. But this time around there are some important differences. Corporations are being more cautious with their investments, and small businesses are being more careful with the money.  Both are good news for avoiding a repeat of the dotcom bubble and its subsequent bursting.

Ackerman notes that the fit between corporations and the small business recipients of their capital investments isn’t always perfect. Corporations are slow-moving, anxious for fast results, and suffer from rapid turnover at the top, all of which can frustrate a small company’s management team.

But for small businesses seeking an answer to their capital problems, the influx of more options for finding investors can only be a good thing in the long run.

Image by Flickr user Futurilla (Creative Commons)

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Small Biz Resource Tip

April 27th, 2011 ::

Springboard 2011

If you’re a women-led business in a high-growth industry looking for investment to propel your business to the next level, you’ll want to bookmark the Springboard: Venture Forum 2011. Springboard is a nonprofit organization whose platform is designed to help promote, showcase and connect investment-ready women-led business with investors, experts and other entrepreneurs. Right now through May 2, Springboard is looking for women-led companies at all stages of business growth to apply for the 2011 venture forum program. The program consists of a four-month relationship building and business assessment program including interviews, a business boot and investor presentment opportunity. Check the site for application qualifications.

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Small Biz Resource Tip: Angelsoft.net

January 6th, 2011 ::

 

Angelsoft.net

If you’re looking for a way to reach venture capitalists and angel investor groups, check out Angelsoft.net’s detailed list of investors. Angelsoft.net provides access to 588 angel groups, VCs and funds, plus over 29,000 investors. Search by the amount of funding you’re seeking, the kind of businesses the investors are interested in, and even the terms the firms usually offer. Angelsoft then manages the deal for the investors, help entrepreneurs with their business plans and more. Prices range from free to $250 a month. Entrepreneurs are limited to three applications at one time.

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Will New Regulations Clip Super Angels’ Wings?

December 23rd, 2010 ::

By Karen Axelton

Have you heard of “super angels”? While regular angel investors put money into small businesses individually or in groups, super angels also manage other people’s investments in startups. In recent years, super angels have become a more important source of financing for small businesses as traditional capital sources have dried up.

But the Securities and Exchange Commission has proposed new financial regulations that could hamper super angels, VentureBeat reports—and that would be bad news for small businesses.

The proposed new regulations would require venture capital funds to be subject to public information reporting requirements for the first time. While experts cited by VentureBeat say this change wouldn’t have a detrimental effect on overall VC financing, it would hurt super angels—currently the fastest growing part of the VC industry.

Super angels typically run very lean and mean with a tiny staff; in fact, many outsource their back office functions altogether. Because the proposed reporting requirements will require compiling and maintaining lots of additional data, super angels would most likely have to revise their back offices and add staff, boosting their administrative overhead.

However, if the proposed rules are adopted in their current form, most traditional VC funds would be exempt based on the Investment Advisers Act of 1940. The good news: The SEC is seeking commentary from the public to ensure that any proposed regulation conforms as closely as possible with the standard industry standard practices that currently exist. This may be a sign that the commission will seek not to disrupt the effectiveness of super angel investors.

You can learn more about the proposed rules and how to submit comments at the SEC website.

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