Where does the growth come from? – A Quick Look at Venture Capital Trends

“New and young companies and the entrepreneurs that create them are the engines of job creation and eventual economic recovery” according to the Kauffman Foundation. Both start-ups and young companies (age 2-5 years) account for the net job creation in the American economy; larger companies tend to grow by mergers and acquisitions. Investment is critical to funding startup and young companies. Venture Capital trends were dismal in 2008 and 2009, but are showing a comeback in Q4 2009 and Q1 2010.

Venture-backed investment decline 2008-2009

Venture capitalists often support these young entrepreneurial companies, providing critical funding to firms who are innovating and growing. Venture capital investment declined in 2008 and 2009. The 2009 VC dollar investment hit the lowest level since 1997, according to the Money Tree Report Q4 2009/Full-year 2009, marking a 37 % decrease in dollars and a 30 % decrease in deal volume over 2008. The Software industry had the largest deal volume of all sectors in 2009 ($3.1b invested), but suffered a 40 % decline in dollars invested. The decline in dollars invested in the CleanTech sector was 52% less in 2009 ($1.9b invested) than 2008.

Venture Capital then exits at the time the firm either goes public or is acquired, so Initial Public Offerings and M&As provide the mechanism to recycle the largest chunk of investment funds back into new innovative firms, and continue the cycle of private investment in economic growth. Venture-backed M&A exits were also well below past figures: in 2009 there were only 262 M&A transactions (disclosed at $12.3b) compared with 378 (disclosed at $29.3b) in 2007. Venture-backed IPOs in 2009 were twice those in 2008, but much lower than 2007; there were 13 exits ($1.9b) versus 68 exits in 2007 ($10b).

Positive Signs in Venture-backed activity Q4 2009 – Q1 2010

VC investment in Q4 of 2009 showed the best quarter. Software, Biotechnology and Industrial/Energy industries attracted the highest level of first-time dollars in the fourth quarter. Companies in these three industry sectors received almost 52% of first-time financing dollars with over $578 million in funding. US CleanTech investment increased Q3 of 2009 to $2.2b, and M&A activity increased dramatically to $7.3b, according to PWC/New Energy Finance. IPOs had their second best quarter in Q1 of 2010 since the end of 2007, with 100 deals and $45b raised (double Q5 2009), according to Seeking Alpha, this increased willingness to invest is a fantastic sign for the tech industry and the global economy. The increased activity in VC activity is renewing focus on high tech growth and health sectors.

According to the Silicon Valley/SJ Business Journal, the Silicon Valley Venture Capitalist Confidence Index is up to 3.65 on a 5-point scale in this first quarter of 2010; this is up from 3.48 the previous quarter. Increased liquidity and confidence are great signs. As this Investment is critical to job growth, it is exciting to see the VC markets coming back to life. Public investment through various State and Federal Stimulus programs, and private investment such as the “Invest in America Alliance” led by Intel and supported by many leading VC firms will hopefully continue this investment trend and create new jobs.

Suggested Reading:

VC confidence in Silicon Valley, China up in Q1 – Silicon Valley / San Jose Business Journal

Cleantech Revolution: Building smart infrastructures – PricewaterhouseCoopers

New Exit Strategies For Venture Capitalists – Forbes

IPO Market Shifts to Growth: Q1 2010 Global Review – Seeking Alpha

Employment Indicators: April 2010 – Seeking Alpha

Money TreeReport Q4 2009/Full-year 2009 – PricewaterhouseCoopers, National Venture Capital Association