What’s Going On…VC Data Spanning the Globe…

By now the 2014 data for venture capital investments from the most important regions of the world have been compiled and disseminated, and when laid out next to each other, some fascinating themes emerge. It is no surprise the U.S. continues to set the pace with over $48 billion invested in 4,356 companies, as compared to 2013 performance of nearly $30 billion in 4,193 companies according the National Venture Capital Association’s MoneyTree Report. While overall the average size per deal increased from $7.1 million to $11.1 million in 2014, when one looks closer, the rotation to Expansion Stage investment from Seed and Early Stage was quite dramatic – 41% of all capital invested in 2014 was in Expansion Stage companies as compared to 33% in 2013. The average round size of Expansion Stage investments spiked to $17 million from $9.5 million in 2013. This underscores a significant development in the venture capital market – with more sophisticated private capital markets, companies are raising larger later stage rounds and staying private longer.

Arguably venture investors are generating greater overall dollar returns by encouraging portfolio companies to stay private longer. In 1986 Microsoft went public at a $500 million valuation and traded to over $3 billion within the first year (and then increased 30-fold over the next 8 years), while Google went public in 2004 at ~$25 billion valuation and traded to over $80 billion after its first year. Facebook went public in 2012 at $100 billion valuation and, after a turbulent first year plus as a public company, finally recovered back to its IPO valuation nearly 15 months later. And of course, recently Alibaba went public at a $225 billion valuation and now trades lower at around $210 billion valuation. These are only a few of the most notable success stories but they demonstrate a company’s ability today to raise very large private rounds of capital to fund hyper-growth, affording early stage and private investors much more of the upside.

Against this backdrop though, there is the explosion in the number of early stage companies being formed, many of them are not raising traditional venture capital. In 2014 over $718 million was invested in 192 Seed Stage companies by venture firms as compared to over $1 billion in 2013 in 235 Seed Stage companies. Crunchbase in 2008 had over 25,000 companies in its database; today that number is converging on 700,000, a very small percentage of which raised capital from VC’s. One might now argue that with fewer active venture capital firms, the VC industry may not be well-positioned to provide seed capital. Maybe VC’s are not able to compete as effectively against other sources of capital such as incubators, super angels or crowd funding platforms? Or maybe VC’s are simply being more discerning given the lack of differentiation between so many look-alike start-up’s?

Harvard Business School Senior Lecturer Shikhar Ghosh recently studied 13,500 venture-backed companies to see how many failed to return 100% of the capital to first-round investors, and the results are disturbing. Since 1990, 76% of the companies in this study failed to return 1.0x to first-round investors (82% in the 1996-2000 vintage were particularly guilty of that). Even more troublesome, although perhaps on reflection not that surprising, in cases when the founder is fired, 90% of those companies failed to return all the capital invested by first-round investors. According to Pitchbook, 40% of all 2014 VC-backed exits were more than $100 million which means one of two things (or both): most of those returns went to the later stage investors or the capital loss rates for the other 60% of companies must be very high, that is, many were sold for well less than invested capital.

A couple other notable trends emerged in the data in 2014…

  • Healthcare (biotech, medtech and services) killed it last year, having raised in aggregate over $9 billion (19% of total dollars raised) as opposed to $6.9 billion in 2013, which clearly reflected the extraordinary investor liquidity in biotech. Average round size for healthcare was $16.5 million
  • Software companies raised $19.8 billion or 41% of all dollars invested in 2014
  • Media and Entertainment more than held its own, raising $5.7 billion across 481 companies (average round size of $12 million)
  • Clean-tech financings came in around $2 billion for 2014 which is more than 50% below what it had been in 2011 ($4.2 billion) but up nicely from 2013’s pace of $1.4 billion; 151 clean-tech companies raised capital last year
  • Telecommunications came in last place of the 17 categories tracked with only $324 million invested in 43 lonely companies
  • Nearly $7.4 billion was invested in first-time financings or 15% of all dollars invested; 40% of the $7.4 billion was invested in Software companies, mirroring the broader investment activity
  • While innovation is a global phenomenon, Silicon Valley just crushed it again in 2014 accounting for $23.4 billion (49% of the total) across 1,409 companies (32% of the total). Interestingly, round sizes were meaningfully larger for Valley-based companies – $16.5 million versus around $11 million for New England and NYC Metro-based companies. So much for capital efficiency!
  • New England and NYC Metro were both a distant #2 accounting for $5 billion each…including the Valley, those three regions were nearly 70% of all investment activity
  • 20 states had fewer than 3 investments in 4Q14 (10 of those had no investments) which always amazes me

Another exciting geography is obviously China, which showed dramatic growth as $15.5 billion was invested or twice the previous record set in 2011 according to VentureSource, but still about one third of the U.S. level. In 4Q14 alone, over $6.8 billion was invested in 243 companies. Much of the investment activity was centered on consumer-centric businesses. IPO activity on local exchanges recently returned as Chinese regulators spent nearly a year overhauling the process to take companies public to provide greater transparency for investors. There were 61 IPO’s in China in 2014 valued at $7.2 billion, and while down from the 141 IPO’s in 2010, it was meaningfully greater than the 15 IPO’s in 2013. Clearly the “Alibaba halo” still shines bright. Chinese venture capital firms raised $4.2 billion in 2014 while private equity firms in China raised $47 billion.

Investment activity in Europe was also robust – $8.9 billion (7.9 billion euros) was invested across 1,460 companies in the Continent (average round size ~$6 million as compared to $11 million in the U.S.). Arguably this activity was also tied to strong IPO activity as there were 55 IPO’s in Europe which raised 3.7 billion euros (as compared to 18 IPO’s in 2013 which raised 500 million euros). And like in the States, Europe has seen innovative new funding models develop such as “equity crowdfunding” platforms where the site takes equity in the start-up’s. However, the U.K. Financial Conduct Authority recently raised significant concerns when it noted that 62% of U.K. investors on crowdfunding sites had no prior investment experience! U.K. regulators estimated that $127 million was raised on these sites last year.

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