US venture capital spend prompts hope and pessimism

NET RESULTS:WHEN IT comes to venture capital investment in the US, it's one of those glass-half-full versus glass-half-empty moments again, depending on how you eye the statistics.

The latest report from the National Venture Capital Association (NVCA), in conjunction with Moneytree and PriceWaterhouseCoopers, indicates VC spending was down significantly – 7 per cent – in the second quarter this year, compared to the same quarter in 2011.

And the report reveals that unless there’s a massive increase in deals in the rest of 2012, venture investment this year will be down on the overall figure for 2011.

So far, some $13 billion (€10.6 billion) has gone into deals in 2012. The full year total for 2011 was about $30 billion in the US. On the other hand, in 2010, investment totalled $23 billion, so this year looks likely to be better than 2010.

The feeling on the ground in the Valley seems to be that investment for the rest of the year is unlikely to rise significantly.

The Silicon Valley venture capitalist confidence index, a survey of VCs taken quarterly by the University of San Francisco, shows confidence has slumped. In Q1, confidence was 3.79 on a scale of five; in Q2, it had dropped to 3.47.

Still, that’s well above the low point of Q3 of 2009, when confidence fell to 2.7. The high point – at least since the survey began in Q1 of 2004 – was in Q1 of 2007, a lofty 4.5, after which it was a downhill, post-Lehmann freefall to that 2009 low.

Mark Cannice, the report’s author, noted that VCs attributed their current reluctance to invest to economic concerns in Europe and China, the regulatory and financing environment in the life science sector, and a disappointing Facebook IPO.

Sure enough, the NVCA report said that investment in life sciences, as well as clean technology, had declined.

But if you are a glass-half-full person, the Q2 numbers – $7 billion invested in 898 deals – was an improvement on the first quarter of 2012, which saw $5.8 billion go into 758 deals. And, in news that will cheer company founders, the amount of money going into early-stage deals has risen to $2.1 billion, supporting 410 start-ups. Amazingly, that’s the highest figure since 2001 – way back at the close of the dotcom boom.

The average first-time deal in the second quarter was $3.7 million, down slightly from $3.8 million in the prior quarter. Seed and early-stage companies received the bulk of first-time investments, with 78 per cent of the deals.

And there was good news for the Valley, too, as it bucked the overall downward trend. Total investment this past quarter, at $3.2 billion, was up 3 per cent on the same quarter last year and well up (52 per cent) on Q1 of this year.

As usual, the Valley had the biggest VC cash haul – 46 per cent of all funds went to San Francisco Bay Area companies, nearly four times the amount that went to New England or southern California firms. Investment rose in software, medical devices and equipment, and internet companies; almost all the software funding went into Valley companies.

Software is booming. The industry received the highest level of funding for all industries, with $2.3 billion invested during the second quarter of 2012, which is the highest investment total for the sector since the second quarter of 2001. A major concern noted in the NVCA report is that consolidation in the VC industry is concentrating most of the available cash in a tiny number of venture firms. Only five VC firms accounted for 80 per cent of funds raised in the last quarter.

Some feel consolidation is a good thing. In the boom, VC funds mushroomed. Talk to those in the industry and they will regularly note that many came into the area with mediocre levels of industry knowledge or investment skill.

But if most investment comes from a handful of VC titans, then the interests, enthusiasms and risk appetite of a narrow range of individuals will have an enormous impact on how crucial and innovative segments of the global economy develop in years to come. The big firms also will likely become the focus for investors, making it harder for smaller VC firms to raise funds.

“The concentration of venture capital dollars in the hands of fewer firms will increasingly dictate the flow of investment,” said Mark Heesen, president of the NVCA, in a statement.

“Currently, this translates into more funding for IT start-ups and less capital available for life sciences and clean technology. We hope to see this investment mix rebalance over time as the start-up ecosystem is better served with more diversity, not less.”

Amen to that. But diversity in investment portfolios is surely most likely to come from diversity, not continuing consolidation, in the investment community.