I was reviewing some data recently on VC activity in 3Q10 in order to better understand what we might be in store for the first half of 2011. At Flybridge we continue to be very excited about the level of activity we are seeing (deal flow for the firm was up ~33% year-over-year) and with the breadth of innovation across all the industry sectors in which we are investing. We even started to see a level of liquidity – either with exits or our portfolio companies’ ability to access equity and debt capital – which augurs well for 2011. But most importantly the underlying operating performance across our various funds showed strong growth (between 50 – 100% revenue growth and in many cases, more than that) which over time should be rewarded with increased valuations – or at least one would expect!
Some interesting data from 3Q10:
- $4.8 billion invested in 780 companies of which 35% was for early stage companies (25% were first time financings) – while a decrease of 30% from 2Q10, this was a reasonably healthy level of activity given it included the summer months and was only down 7% year-over-year. My sense is that the drop in financings is attributable to fewer active VC firms. More importantly the number of first time financings was quite robust which indicated the VC industry was still prepared to take on new company risk.
- Diversity of industries – life sciences (35%), software (21%) and cleantech (9%) were well-represented in the quarter – the diversity by sector was also matched by diversity by stage and geography.
- Capital raised vs. capital invested – while VC’s invested $4.8 billion, VC’s only were able to raise $3 billion which is the first time in a very long time that the industry invested more than it raised in a given quarter. My guess is the VC industry will have raised between $10 to $12 billion in 2010 ($28 billion was raised in 2008). From 2008 through 2011 we will have witnessed the VC industry being cut in half.
- Deal size – average size of investment rounds was $6.2 million which reflects smaller fund sizes and the fact that VC’s are investing in more capital efficient business models.
- Valuations – data showed some stability returning to valuations and even some frothiness in certain sectors (storage, social media). Entrepreneurs today can expect – with a lot of work and a compelling story – to be able to raise capital on reasonable terms versus a few years ago.
- Inconsistent liquidity – limited IPO activity unless you were a Chinese internet company and mostly highly strategic (or distressed) M&A transactions. VC holding periods are now running toward 8+ years from the historic 3 to 4 years. Continued bad news.
Liquidity is the most pressing issue VC’s face. The Wall Street reforms of a few years ago decimated the ability for small private companies to go public. Of note is the fact that the largest 15 public tech companies are estimated to have in excess of $300 billion of cash – and in the face of modest growth and low (effectively 0%) interest rates, the expectation is that large companies will begin to aggressively acquire VC-backed portfolio companies.