Saturday, December 27, 2008

Venture Capital Trends: By Stage, Round, & Industry

In March, I noted that venture capital is moving "up the ladder" - more money was flowing into latter stage investments, with only about 10% of VC deals going to start-up stage investment (as compared to 25% in 1995).

In August, I examined venture capital investments by financing round which revealed that Series E round financing is on the rise which augments this earlier observation. Extending the March data through the end of Q3 2008 shows no real change - venture capital continues to flow into later stage rounds.

(click on the chart to enlarge)

However, there is a case for the "stability" of the Early Stage round trends. In their Fall 2008 recent report - "The Entrepreneurs Report," Wilson, Sonsini, Goodrich, & Sonsati (WSGR) stated that "this stability is one of the key indicators of the continuing rate of innovation in the sector, and clearly a positive sign in the face of the ongoing economic turmoil impacting world markets." (More on this at the end of these trend charts.)

Extending this analysis with the latest data from PWCMoney Tree, I examined venture capital investments by industry since 1995 to see if there were any structural changes of the industries receiving funding. Here is a summary of the data. (Note: Percentages measured in terms of total dollars invested.)

1. Hardware/Telecommunications: This industry grouping shows a clear downward trend in hardware-related industries since 2001.

This isn't terribly surprising, as many of the operational functions are moving from heavy equipment to cloud computing solutions.

2. Biotech/Medical/Energy: This industry grouping shows a clear upward spike in Biotechnology early in the decade (though waning a bit lately), a lagged spike in Industrial/Energy (reflecting the demand influence of clean and renewable energy technology), and a consistent rise in Medical Devices (maybe because more people are getting older and we're generally less healthy?).

Again referring to the WSGR report - "Early-stage companies are particularly well positioned to successfully respond to the challenges posed by future climate legislation." Further, the National Venture Capital Association released the results of a recent survey conducted from November 24 - December 12, 2008 and includes the predictions of more than 400 venture capitalists from across the United States. In a summary of this survey prepared by VCExperts - "clean technology is viewed by the highest percentage of respondents as potentially growing in 2009 with 48 percent predicting increased investment and 20 percent predicting unchanged investment."

3. Software, Financial Services, and Media/Entertainment: I grouped these together because of the movement towards cloud computing and the ongoing convergence of media and software applications in places like Facebook. No major changes in this group which was a bit surprising. With the influx of angel capital in recent years and the lower start-up costs required for software-related companies, I expected venture capital investment dollars to have declined, which is indeed falling steadily in the Software industry.

Overall, the consensus for the 2009 venture capital industry isn't terribly positive. The aforementioned NVCA survey reveals that 92% of VCs expect a downturn in 2009. The Fall release of the University of San Francisco Venture Capital Confidence Index reflects these sentiments as well.

While a general economic slowdown is an easy scapegoat for the negative outlook, Michael Malone wrote an outstanding piece in the Wall Street Journal - "Washington is Killing Silicon Valley." Malone's opinion article clearly describes the elephant in the room when it comes to innovation and technology - heavy regulation places a long-term management cost when start-ups seek their IPOs. These projected costs outweigh the risk-adjusted benefits to new business ventures. Maybe there's a reason we're seeing the trends outlined above.


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