New data from the venture capital industry put some cold, hard numbers on how
tight belts have gotten in startup land.
The new MoneyTree report from the National Venture Capital Association
and PricewaterhouseCoopers shows that VCs invested less money in private
companies last year than in 2011 -- the first such annual decline in three
years.
And venture investors became increasingly cautious as the year went on:
In the year's second quarter, with enthusiasm soaring for the initial public
offerings of Facebook and LinkedIn, venture funding followed suit.
But Facebook's underwhelming Wall Street debut, combined with ongoing
volatility in the
broader economy, left 2012 trailing 2011 in the number of tech IPOs and
mergers -- the lifeblood of venture investment returns.
Venture funding, not surprisingly, dropped in both the third and fourth
quarters, to $6.4 billion in the three-month period that ended in December.
That was a 3 percent decline in dollars compared to the third quarter, though
deal volume rose 5 percent, with 968 companies funded.
For the year as a whole, venture funds invested $26.5 billion in 3,698
deals. That was a decrease of 10 percent in dollars and a 6 percent drop in
deals over 2011.
Still, the president of the venture capital association said he sees
reason for optimism in the numbers.
"Most people would say, 'Oh my gosh, the sky is falling,' " said Mark Heesen. Instead, he believes the tightfisted
funding mood -- and an ongoing shrinkage in the number of venture funds --
will lead to "a more disciplined environment. The companies that are going to
be funded are going to be really good, and a lot of the 'duplicative'
companies aren't going to be funded."
Tracy Lefteroff, who heads the global venture capital practice at PWC,
largely agreed. His firm and the venture capital group prepare the MoneyTree
report using data from Thomson Reuters.
Lefteroff argues that the hefty venture investing of early last year
reflected irrational exuberance over the promise of social media. "If you
remember, there were a slew of companies lined up to go public, and that went
away very quickly," he said.
Concerns about looming budget battles in Washington, D.C., he noted, also
are helping tamp down investor enthusiasm, both among venture capitalists and
big Wall Street investors.
Matt Hendrickson, CEO of a San Francisco startup called Ascendify, said
the shrinking venture capital pie means more competition among tech
fledglings.
"We just have to be that much better in 2013 to secure our next round of
funding," said Hendrickson, whose year-old company
makes talent-recruitment software for enterprise clients. He's currently
raising a seed funding round from angel investors and early stage venture
firms, but he's already looking ahead to a larger Series A round a year from
now.
Lefteroff said software companies, in fact, are still enjoying favor from
venture investors. In 2012, VCs invested more in software deals than at any
point since 2001, according to the MoneyTree data.
Capital-intensive biotech and cleantech, on the other hand, were
particularly hard hit last year, part of an ongoing trend.
Clean technology saw a 28 percent decrease in dollars and a nearly equal
decline in deal volume compared to 2011, the MoneyTree report found. Things
were even gloomier in the fourth quarter, when venture capitalists put $535
million into 67 cleantech deals -- a 36 percent drop in dollars from the third
quarter.
Venture investments in the life sciences -- including biotechnology and
medical devices -- fell 15 percent in 2012, to $4.1 billion. On the bright
side, that still represented the year's second largest investment sector in
terms of dollars and deals. And life sciences saw an uptick in the fourth
quarter.
Lefteroff remains fairly bullish on the life sciences, noting there's
still "huge unmet needs" for new therapies. But given the long and often
obtuse process for new drugs and devices to receive federal regulatory
clearance, pharmaceutical companies and other investors remain conservative,
he said.
Cleantech, Lefteroff said, may face an even steeper challenge, given that
such companies require vast amounts of cash to grow and that there have been
relatively few IPOs or big acquisitions to enable venture investors to reap
returns.
"How long can the venture guys continue to fund these companies," he
asked, "and who's going to be there to pick up the pieces?"
Heesen agreed that the plunge in cleantech and life-sciences funding is a
concern.
"I think you are seeing a change in the market," he said. "You're going
to see more deals that sort of work around the edges, as opposed to trying to
create a new car company or a new type of energy."
