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US venture capitalists look to 2011 to steady the ship

After the turbulence of credit crunch and recession, US venture capitalists regained some confidence in 2010. More money is becoming available for seed investments and start-ups, and the words Initial, Public and Offering are creeping back into the lexicon

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Venture capital investment in the US picked up in 2010, with the number of deals topping 2,800, worth a total of more than US$ 21 billion, according to the two surveys of the industry. Investors expect more of the same in 2011, with high single-digit growth and a stabilising of the industry.

Most notably in 2010, pent-up demand for late-stage deals finally burst through the gates, and there were more seed and early-stage investments. Software topped IT investments, and energy-related clean technologies continued their steep ascent.

“The word [sic] IPO is now slowly creeping back into the vocabulary of venture capitalists,” said Seth Levine, managing director of the Foundry Group, a Boulder, Colorado, technology investor. “In 2011, the money invested will see high single-digit growth over 2010. But I’d look to 2012 as really being able to answer the question of what the new normal is.”

First rise since 2007

In 2010, there were 3,300 deals worth a total of $21.8 billion, up 12 per cent in terms of the number of deals, and 19 per cent in value over 2009, according to the latest MoneyTree Report by PricewaterhouseCoopers LLP and the National Venture

Capital Association (NVCA), based on data from Thomson Reuters. “This is the first annual increase for US venture capital since 2007,” according to Matthew Toole, research director of private equity, Thomson Reuters. .

“If you are starting a company there is money there. Good deals are getting funded at near-record levels. But it’s not a time - as it was years ago - that you put your hand in the air and money would hit it,” said Gerard Langeler, general partner, OVP Venture Partners, Kirkland, Wash., which invests in cleantech, life sciences and IT.

In a separate report by Dow Jones VentureSource counted 2,799 venture deals raising $26.2 billion, up 6 percent in deals and 11 percent in value over 2009. The median deal size in 2010 was $4.4 million, down from $5 million the year before.

Software and cleantech strong

The healthcare and IT industries accounted for more than half of venture investment in 2010, but are not driving growth in VC investment currently, said Jessica Canning, global research director of Dow Jones VentureSource. “Investment in business technologies, consumer solutions and energy companies gained the most traction in the last year.”

Investment in healthcare fell 7 percent in 2010 to 702 deals with a value of $7.4 billion, according to Dow Jones. Biopharmaceuticals companies raised most money in the healthcare sector, with 317 deals, and a total value of $3.4 billion. IT companies nudged up to $7.2 billion for 889 deals, compared to $6.7 billion for 858 deals in 2009. In the energy sector, renewables companies collected $2 billion for 94 deals, up 35 per cent in value and 25 per cent in the number of deals, over the prior year.

The MoneyTree Report says there were double-digit increases in investments in 2010, spread across almost every industry, including cleantech and Internet technologies. The software industry recaptured its status as the single largest investment sector for the year, rising 20 per cent over 2009, to $4 billion in 2010. In all there were 835 deals, up 21 per cent over 2009.

Biotechnology investing rose only modestly in 2010, by 3 per cent in dollars and 8 per cent in deals, with $3.7 billion going into 460 deals. It dropped behind software to be the second-largest investment sector in terms of money raised and number of deals.

By contrast, cleantech saw a significant increase in 2010, with $3.7 billion invested in 267 deals, up 76 per cent in cash terms and 37 per cent in volume from 2009. But even given this rise, the investment level remained below the $4 billion raised in 277 deals in 2008, the high water mark for the sector to date.

Cleantech investing accounted for 17 percent of all venture capital dollars in 2010 compared to 11 percent in 2009. “Cleantech continues to show its ability to attract large investment,” said Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers.

Internet companies also saw $3.78 billion going into 729 deals, a 28 per cent increase in dollars and 14 per cent in deals from 2009.

Money freed-up for early-stage companies

Both reports saw an increase in later-stage deals, which for Dow Jones accounted for 40 per cent of the 2010 deals and 61 per cent of the total capital raised. MoneyTree cited $6.3 billion invested into 746 later-stage deals, up 3 per cent in dollars but a 9 per cent decrease in deals for the year.

Investments into seed stage companies decreased 2 per cent in terms of dollars but increased 4 per cent in terms of deals, with $1.7 billion going into 363 companies in 2010, according to MoneyTree’s data. Early-stage investments saw double-digit increases, rising 15 per cent in terms of dollars and 25 per cent in terms of deals in 2010 to $5.3 billion in 1,147 deals.

First-time financings jumped 29 per cent both in dollars and deals from the prior year, rising to $4.3 billion going into 999 companies. The sectors that raised the most in first-time financing in 2010 were software, biotechnology, and industrial/energy.

In total, 51 per cent of first-time deals in 2010 were in early stage, followed by seed stage at 24 percent, expansion stage at 17 percent and later stage at 8 percent, according to the MoneyTree report.

“We noted in 2010 that the pressure is being taken off of late-stage companies needing exits, setting the way for the next wave of companies. First-time funding shows new companies are being brought into the ecosystem,” said John Taylor, head of research at the National Venture Capital Association. “In 2006 and 2007 it was difficult to do an exit. There has been some relief since. Later stage companies needing money are starting to move on, so this is a positive sign.”

Lefteroff agreed. “Of the 165 life science deals, 40 percent were early stage, so that is a positive sign.”

Personalised medicine attracts venture interest

Meanwhile, Levine said the overall market for IT investments strengthened over 2010, notably in the advertising and mobile technology sectors. “There is an increase [in] activity and energy in the overall venture market for IT, particularly in the seed and early stage part of the market. We invested in eight new companies in 2010, including three seed companies, the same as in 2009,” he said. “The vast number of our investments were less than $1 million.” He said Foundry also is seeing an uptick in activity in personal instrumentation companies that track more and more of what people do.

Langeler also pointed to personalised medicine, which is also attracting venture interest in Europe. “Personalised medicine leads to more biotech platform technologies, a technique that can be used across different diseases with different drugs,” Langeler said. One example is turning on pumps selectively to rid cells of damaging contents. “This comes out of computer modelling of how cells behave. So it’s biology and computers. We’re seeing startups in that area.”

In Europe, Index Ventures raised $400 million dollars in its last fund, of which about half will be invested in life science start-ups. Senior partner Francesco de Rubertis said personalised medicine will take a large share of that.

VCs optimistic in 2011

Venture capitalists expect to invest more in 2011, but they were divided about fundraising for the year, according to a separate study released last month by the National Venture Capital Association and Dow Jones VentureSource, which polled more than 330 venture capitalists in the US, along with 180 CEOs of US-based, venture-backed companies.

“At this time last year, the venture capital industry was optimistic, but cautiously so,” said Mark Heesen, president of the National Venture Capital Association. “The market was so troubled in 2009, the sentiment was that things had to get better in 2010.”

Fifty one per cent of venture capitalists polled expect investment to pick up in 2011, while 24 per cent expect it to remain the same. Another 24 per cent expect it to decrease. Fifty one per cent predicted increases in later-stage investment, 49 per cent in expansion and seed investment, and 46 per cent in early-stage. Of those who invest in the earlier stages, 30 per cent plan to co-invest more with angels.

More VCs expect investments in IT to increase more than in the life sciences and cleantech sectors. Investments in consumer Internet and digital media, cloud computing, and mobile/telecoms are expected to rise in 2011. Twenty eight VCs identified cleantech as likely to see investment froth in the year ahead, while only 38 per cent expect increases in energy investment.

Asia to take majority of US VC’s overseas investments

There is also optimism about the healthcare IT sector, where 77 percent of VCs expect investment to increase. There was no clear consensus on how medical devices and biopharmaceuticals investments would fare.

While 53 per cent of VCs do not intend to invest in start-ups outside the US in 2011, those who do plan to invest overseas view Asia as a prime target, with 26 per cent of those looking at China and 18 per cent interested in India. Western Europe ranked just above India with 19 per cent planning investments there. Eleven per cent indicated they will invest in Latin America in 2011.

Despite optimism on investing in companies, VCs are divided on whether fundraising will increase, decrease or hold steady, with about one-third predicting each scenario. Still, 48 per cent expect more funds to see foreign limited partners in the coming year.

While 2010 was a low year for venture firm fundraising, Langeler does expect a lot of funds to come back to the market this year. “2011 will be better, but not too much. The year to look for is 2012,” he said. “How those funds do will tell how the industry will do in the middle of the decade.”

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