2012 Venture Outlook: Some Bright Spots and Some Gloom

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a disproportionate amount of the $18 billion raised from limited partners last year. Heesen interprets this as another indication of industry contraction, and predicts VC firms will continue to shed partners, stop making new investments, or close their doors altogether.

—Corporate venture capital is increasing. Many big U.S. companies are seeking guidance from the NVCA in establishing corporate venture funds. “If there is one area where you’re seeing a lot of activity, it is in corporate venture capital,” Heesen says. While most people know that Intel operates the largest corporate venture fund in the U.S., Heesen says few people realize that Qualcomm’s is the second-biggest.

—Cleantech has become a major category for venture funding over the past decade, increasing from a total of $300 million—or less than 1 percent of all venture capital investments in 2001—to $4.3 billion—or 15 percent of the total invested in 2011.

—The drop in first-funding deals in life sciences startups is alarming. First-funding deals (typically Series A round) in life sciences companies dropped to 153 deals in 2011—a nearly 43 percent decline from the 268 first funding deals in 2006. “We’re hearing a lot of concern from VCs about the FDA time-to-market approval,” Heesen says. “And we’re hearing a lot from the limited partners about length of time it takes for them to see a return on their investment.”

—IPOs remain well below what’s needed for capital turnover, Heesen says. In 2011, 52 venture-backed IPOs raised almost $9.9 billion. IPO activity hit a wall in mid-August, suffering from the combined effects of the Congressional deadlock over the federal budget, Europe’s economic woes, and worries over the political revolution in Libya. At the end of 2011, 60 U.S. companies were in registration and waiting to go public.

—The IPO bottleneck has led to a record number of acquisitions over the past two years, with 429 M&As in 2011 and 436 in 2010.

—Heeseen says he expects venture capital deals are continuing to cluster along the East and West coasts, with a hole expanding in the Central U.S., where it is becoming increasingly difficult for technology and life sciences startups to attract VC investors. California, especially Northern California, will continue to attract the biggest chunk of venture money, he predicts.

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