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Summary:

Slow and steady wins the race. Given the VC industry’s penchant for hockey-stick growth charts, it’s far from their slogan, but when it comes to a slow annual growth in funding data, it’s a welcome sign. The PricewaterhouseCoopers/National Venture Capital Association MoneyTree data is out for […]

Slow and steady wins the race. Given the VC industry’s penchant for hockey-stick growth charts, it’s far from their slogan, but when it comes to a slow annual growth in funding data, it’s a welcome sign. The PricewaterhouseCoopers/National Venture Capital Association MoneyTree data is out for 2007, and the $29.41 billion invested in companies is the highest level since 2001, when VCs plowed $40.62 billion into businesses.

What they don’t say in the release is that before this, 2006 was the highest level since 2001 — and before that, 2005. Venture investing has risen almost steadily since the incredible drop seen between 2000 and 2001, when the $105.11 billion that went into startups fell by 60 percent.

This is pretty good news for people worried about the next technology bubble. It’s not to say that technology companies big and small won’t be affected by the current weakness in the economy, but venture investment doesn’t have as far to fall. Sure, there are what seems to be a hundred new startups popping up, but most of these haven’t raised $25 million in Series A like some of the telecom copycat deals of the late 90s.

Some quick math with dollars invested and the number of deals shows that the average deal size today is about $7.7 million compared with $13.3 million in 2000. That points to more reasonable amounts getting put into deals and given the smaller amounts put on the line, investors are likely anticipating a more reasonable M&A exit while still hoping for the home run IPO.

Those exits should become clear in the next year or two. Last year 1,168 firms received later stage funding, or 31 percent of the total number of deals. The year before, 1,006, or 28 percent of total deals, scored late-stage funding. Typically those firms are about a year or two away from an exit, and since many are becoming pessimistic about technology IPOs in 2008, it will be worth watching to see how many of those companies get picked up in M&A deals.

  1. The VC industry is more than a bit ill at its present size – most firms are making negative returns for themselves and their LPs, and will continue to do so with IPO market at a very low ebb.

  2. There’s lots of money to be made yet. The biggest technology I see on the horizon is WiMax. It will change everything. Goodbye cable, satellite, fiber, cellular, copper, BPL, etc.

    http://RSSLiveTV.com – an easy way to tune into live internet television

  3. A really good analysis. However I find the last paragraph about more number of late stage financing a bit more disturbing. Venture capitalism needs to come a bit more early. Else we may face the danger of less innovation.

  4. VC cant sit out of web 2 drama , which is opening up now gradually — too risky to leave for post recession.

  5. Where Did All the Software Seed Money Go? « SmoothSpan Blog Sunday, January 20, 2008

    [...] by smoothspan on January 20, 2008 I read with interest Stacey Higginbotham’s GigaOm post on VC investment in 2007.  The gist was that there’s no bubble here, at least compared to how [...]

  6. I think that VCs will be more selective in 2008. The days of web 2.0 acquisition sprees are numbered. I think we will see larger, later stage rounds though, i.e. B and C round financings.

    Cheers,
    Aidan
    http://www.MappingTheWeb.com

  7. Hawaii Vacations Monday, January 21, 2008

    I wonder how many VC’s have made their money back from their initial investments

  8. VCs Start the Year With a Whimper – GigaOM Friday, April 18, 2008

    [...] is still above those of previous years, he’s optimistic that the industry will continues its slow and steady growth, even despite an economic [...]

  9. VCs Reap What They Sow – GigaOM Tuesday, July 1, 2008

    [...] rise until the middle of 2005 means that fewer IPOs may not lead to huge venture crisis. There is a rising backlog of later-stage companies waiting to go public or get acquired, but in a cyclical business it’s important to look at the entire cycle. I [...]

  10. Reblog » Blog Archive » Update: VCs Reap What They Sow Thursday, July 3, 2008

    [...] rise until the middle of 2005 means that fewer IPOs may not lead to huge venture crisis. There is a rising backlog of later-stage companies waiting to go public or get acquired, but in a cyclical business it’s important to look at the entire cycle. I [...]

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