The 4Q 2010 VC funding data were released today – and the headline was quite upbeat. VC’s invested $5 billion in 765 deals in this past quarter, which while essentially flat quarter-over-quarter, brought the full year investment totals to $21.8 billion in 3,277 companies. In 2009 VC’s invested $18.3 billion in 2,927 companies. Easy to conclude that with volume up, the VC industry is on the road to recovery but a new issue is emerging – the dreaded shrinkage.
The headlines mask some fascinating insights when one looks closer at the detailed data released in the MoneyTree Report prepared by PricewaterhouseCoopers LLP and the National Venture Capital Association (NVCA), based on data from Thomson Reuters. Just a couple of tidbits…
- Sector Rotation: Software is back – by a lot. In 4Q10 Software as a category attracted $1.23 billion across 218 deals which compares to $853 million across 72 deals for “industrial/energy” (which is effectively the Cleantech category) in the #2 spot. More notably – Biotech which had been #1 or #2 quite consistently over many quarters – dropped to #3 with only $685 million invested in 94 deals; Medical Device fell even further ($400 million and 71 deals, respectively). For the entire year Software saw a jump of 20% in dollars invested over the prior year.
- Healthcare Investing: As noted above the question that jumps off the page is “are we seeing the impact of the uncertainty of healthcare reform on the healthcare sector?” I think so. VC’s do not like regulatory uncertainty, especially when coupled to extraordinary biological uncertainty. This trend is very disturbing and without sounding too dramatic, if it continues, it will affect the quality of people’s lives.
- Is Cleantech Back?: While the sector more than doubled from 3Q to 4Q this past year ($418 million to $853 million) I think it is premature to declare victory here. Clearly VC sentiment as rotated away from large supply side (generation, distribution – looks more like biotech risk profile) cleantech plays to demand side management (usage monitoring – looks more like software/hardware risk profile). Notably the average dollar invested in Cleantech in 4Q was nearly $12 million per deal which is almost twice the $6.6 million for all deals in that quarter. Still feels very capital intensive for VC’s whose own industry is shrinking. Which is my next point…
- Shrinkage: This is something I have been tracking closely for the last few quarters. For the quarter VC’s invested $5 billion against what I would guess will be less than $3 billion raised in new funds when reported; for the year the numbers look like $21.8 billion invested as compared to probably around $12 billion raised (this number won’t be reported for some time still). Arguably the VC industry shrunk by $10 billion in 2010 – maybe not big a deal when you consider that in the US the VC industry manages more than $200 billion – but much of that was raised and invested a decade or so ago. When – and how – this trend is reversed is on everyone’s mind.
- Stage Rotation: The shrinkage is evident in the allocation by stage of deal – more dollars are going into earlier stage companies and these rounds tend to be much smaller in size. Seed and Early Stage captured nearly 30% of all dollars invested in 4Q (which was nearly identical to 3Q data); I also happen to believe that the level of Seed and Early Stage investing is wildly under-reported. Not the case in the Late stage category which dropped from 35% in 3Q to almost 24% in 4Q; that difference showed up in Expansion stage (Series B) which went from 33% to 43% quarter-over-quarter. This makes sense – as we saw the advent of Super Angel and MicroVC models 12+ months ago, many of those companies were out raising follow-on Series B rounds this past quarter. And with smaller new funds being raised in this environment, VC’s are looking to invest less which tends to push them to earlier (and smaller) round sizes. Notably there were nearly 30% more new companies raising VC dollars in 2010 than 2009.
- Boston Vs. New York: I was reluctant to wade into this debate but here I go. New York had a very strong 4Q but not strong enough to eclipse Boston (by Metro Region) for the year. In 2010 there were 313 deals which raised $2.12 billion in Boston as compared to 350 deals which raised $1.87 billion in New York. If you expand the aperture to New England the numbers are 387 and $2.54 billion. In terms of deals and dollars Boston and New York were basically the same in 4Q so quite clearly New York is catching up as a region to Boston, which very directly reflects the explosion of digital media, Super Angel activity in NYC. Average deal size in NYC is much smaller than that for Boston.
All in all a reasonably good quarter. What the data do not comment on are liquidity events – which is the real elephant in the room. Until we can show predictable repeatable liquidity, the VC industry will shrink which hurts anyone playing in the Innovation Economy.