NVCA Today

Against a backdrop of continued economic gloom—but some public market improvement—the statistics confirm that the U.S. venture capital industry remains very much open for business. First time financings are being done for the most promising opportunities. Later rounds continue although on a smaller scale than two years ago. Fundraising remains tough in the current environment. IPOs remain scarce although there is some pickup in registrations. The poor M&A exit market we saw in the first half of 2009 continued through Q3.

MoneyTree Investment in Companies

Venture capital investment levels have shifted to a new, smaller size band. After several years of investment in the upper $20 billion levels, full year investment will likely not reach $20 billion for 2009.

MoneyTree™ Investment 1995-9M09

The contention for venture capitalist attention (and dollars) between existing later stage portfolio companies and newly-developed business plans continues. The number and proportion of later stage companies being funded by the industry is at all time record high levels.

While reports from the field are that VCs are seeing high quality deal flow from good teams, the industry has nonetheless reduced the number of new portfolio companies it is taking on. After years of taking on 1,000+ companies each year, the industry in 2009 will likely not fund more than 700 first-time companies.

Then and Now

One way to understand where the industry is now is to compare it with past periods. The analysis below compares the most recent 12 reported months (4Q 2008 through 3Q 2009) to the average of 1995-1998. What this chart tells us is on a very similar number of deals, the percent of activity involving later stage companies is now triple the level of the comparison period. This is not surprising in that many companies have reached, or continue to reach, the later stage and are unable to move beyond in the current environment.

Then and Now - Comparison to mid1990s

When 3Q 2009 MoneyTree results were announced, some articles pointed out the record* low amount of investment in first fundings into first time companies during Q3 2009. What was perhaps overlooked is that the 155 companies getting first financings each represented a new, voluntary commitment in the part of venture capitalists in the future. Also, the $633 million VCs invested in the 155 first time companies in Q3 2009 represented an investment of over $4 million per company. While smaller than many recent venture rounds, it should be noted that these days there are opportunities for capital efficiencies in tech startups which can take advantage of cloud computing, online document sharing, robust free email, and an emerging culture of location-independent teams.

Fundraising and Commitments

Fundraising, which for all but the most proven and promising firms had been difficult over the past several years, slowed dramatically as 2008 came to an end. It remains slow in 2009. Institutional limited partners found that plunging valuations in the public markets caused an over-allocation to alternative asset classes such as venture capital. This so-called "denominator" effect made it very difficult for existing limited partners to take on any new commitments. Whether the Q4 comeback in public market valuations will mitigate this remains to be seen. Remember too, with few recent exits, there have been few distributions back to the LPs. This creates little capital that can be easily recycled into new funds.

In 2009, fundraising slowed dramatically with only $8.3 billion raised in the first three quarters.

While the industry does have capital on hand, an ever-increasing portion of that is earmarked for follow-on investment in existing portfolio companies. A prolonged fundraising drought could make future investment difficult.

Fundraising by Venture Funds

IPO Draught Continues As Later Stage Companies Consider 2010 Strategies

The lack of initial public offerings for venture-backed companies has garnered considerable attention. IPOs are generally the most successful form of exit for the venture firms and the investors. Cash raised through the IPO process is distributed to the LP investors which in turn the LPs generally recycle into future venture fund commitments. This ecosystem has stopped working. In 2008, there were a dismal total of 6 venture-backed IPOs. There were no IPOs in Q1 2009. There were 5 venture-backed IPOs in Q2 and 3 in Q3. The zero IPO quarters in Q2 2008, Q4 2008, and Q1 2009 represent the first, second, and third occurrences of that since the 1970s.

To put recent IPO drought in perspective, assuming 14% of venture-backed companies go public (which was the case with companies first funded in the 1990s) and 1,100+ come into the system (first time fundings) each year, we would expect 150+ IPOs each year. While it is likely that the world going forward will be different than the 1990s, we know that 6 IPOs or 8 IPOs per year is simply not sustainable.

Venture-backed Exits - Recent M&A And IPO Activity

At the end of Q2 2009 there were 10 companies in registration to go public. At the end of Q3 2009 there were 18. As this is being written, we are hearing from a number of companies considering filing for an IPO early in 2010 but those registrations have not shown up in our quarterly counts yet.

M&A Activity Also Slows - Strong Acquisition Valuations Become Scarce

Unfortunately, acquisition exits are not faring much better. There were only 189 acquisitions in the first three quarters of 2009, which is far below the 350 or so annual run rate for much of the post-bubble period. Based on those deals with disclosed prices, those acquisitions which did take place were small. Approximately $4.4 billion was raised through M&A—a small fraction of traditional levels.

The latest industry statistics and NVCA's Yearbook can be found on the NVCA website. NVCA Members also have access to an updated "State of the VC Industry" presentation through the members-only portion of the website. This presentation is chock full of the most recent industry data points.

*  MoneyTree™ reports start in 1995 although data is available going back to 1980 and earlier

**  In the fundraising chart, the number of funds raising money during the year will be less than the sum of the funds raising money in each quarter. This is because a fund can, and typically does, raise money across multiple quarters.