NVCA Today

Despite the widespread turmoil in the US and global economies, NVCA research statistics through the first three quarters of 2008 reflect a U.S. venture capital industry that is very much open for business. From the challenges of non-existent IPO markets, soft acquisition markets, and newly received reports of fundraising challenges, there is much for us to watch. But all of this is balanced by reports of record levels of high-quality deal flow and teams coming to the industry.

As these latest statistics show, there is an ever-increasing number of companies stuck in the later stages awaiting exits. Despite this, we expect the industry to make an initial investment in well over 1,000 new companies this year. The business environment overall is difficult for emerging companies to be selling products particularly to the commercial information technology sector. Reduced burn rates and capital efficiency become more than mantras with portfolio companies, they become mandates. And yet, investment continues.

IPO Draught Continues with Few Signs of Better Times in the Near Term

The chart below shows M&A acquisition and initial public offerings of venture backed companies. Following encouraging strength in 2004 (Google was a part of that but it was not alone) and lesser strength in 2007, the exit markets have fallen flat.

IPOs have all but stopped in the nine months of 2008. Five companies went public in Q1, none in Q2 and only one in Q3. A total of six IPOs does not bode well for the industry and means that some good, mature companies remain in venture fund portfolios drawing on the time and financial support of the venture capitalists.

Too few companies are going public. But how many should there be? Recent analysis by the NVCA of all companies initially funded during the 1990s shows that 14% of them went public. In recent years, approximately 1,000 companies are funded for the first time each year. If 14% of those eventually go public, that suggests a run rate of 140 companies per year going public, or 35 per quarter on average. Recent years have been at levels far below that.

While most IPOs can give good results to the venture investors, an "acquisition" exit can be a home run, fire sale, or something in the middle. To understand the quality of venture backed acquisitions, consider the third quarter of 2008 results along side 2007 results. While there have been far fewer acquisitions thus far in 2008, 54% of those companies sold for more that 4x total venture investment compared with 43% in 2007 and 38% in 2006.

Analysis of Transaction Values versus Amount Invested*

What's Happening in Investment?

Nearly a third of venture deals are going into later stage company. The industry has never seen levels this high. This effect has been likened to the high school that has lost its diploma printing machine. The seniors are unable to graduate and leave. Meanwhile, new classes are rising to their senior years joining the prior classes awaiting graduation. This has made it difficult for the industry to turn its attention to the next crop of companies. While 14% of the third quarter deals went to seed and start-up companies, this is far below the levels seen in the growth years of the mid-1990s.

Likewise, the percent of deals going to first time companies reversed course from recent gains and fell in third quarter. One quarter does not a trend make, but it does bear out what we are hearing from NVCA members and entrepreneurs.With the need for capital efficiency going forward and an uncertain business environment to grow a company, this is a statistic we are watching closely.

Venture Capital Investment 1995 to 2008YTD

Clean Technology Venture Capital Investment

Not surprising, venture investment in clean technology companies now exceeds 10% of all US investment and continues to grow. In the first nine months of 2008, clean technology investment exceeded the full year 2007 total dollars. Clean technology deals tend to be larger with the $15.25 million average per deal essentially double the $7.72 million average deal size across all sectors.

Source:PricewaterhouseCoopers/National Venture Capital Association MoneyTree^TM Report, Data:Thomson Reuters

Where to Go for the Latest Statistics

Quarterly statistics are posted on the NVCA website. There are four information releases for a typical quarter:

• Exit Poll (IPOs and Acquisitions) - typically published a day or two after each quarter end
• MoneyTree (Money invested by VC firms in portfolio companies) - Officially known as the "PricewaterhouseCoopers/National Venture Capital Association MoneyTree^TM Report, with data provided byThomson Reuters." This is typically released 3-4 weeks after the close of the quarter. Shortly after that, searchable statistics and downloadable spreadsheets can be found at www.pwcmoneytree.com.
• Fundraising (Commitments) - Typically released around the time of MoneyTree
• Performance (IRRs) - Thomson compiles venture capital IRR benchmarks and these are released with at least one quarter lag by the NVCA and Thomson. Buyout and mezzanine return statistics are released directly by Thomson.
  
  

The NVCA 2008 Yearbook, available as PDF file to NVCA members, provides historical data back to 1980. A copy can be downloaded from the NVCA website.

NVCA members who subscribe to VentureXpert can access the data anytime, even as it is being accumulated and posted at quarter end. For more information about the NVCA research program, contact John Taylor at This e-mail address is being protected from spambots. You need JavaScript enabled to view it . Significant NVCA member discounts are available for online subscriptions to the VentureXpert database. Contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it for more information.