Venture Funding Slows as VC Industry Contracts, & Top 10 Deals List

Overall venture capital activity slowed in the U.S. during the first three months of 2013, with venture capitalists investing $5.9 billion in 863 deals nationwide, according to the MoneyTree Report released today.

Compared with the previous quarter, VC funding was off nearly 12 percent and the deal count was down almost 15 percent. Venture firms invested $6.7 billion in 1,013 deals in the fourth quarter of 2012, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association (NVCA), based on data from Thomson Reuters.

The amount of capital deployed during the first quarter also was down over 6 percent from the same quarter last year, when nearly $6.3 billion was invested in 868 deals, according to MoneyTree data.

John Taylor, who heads research for the NVCA, told me by phone there is nothing unexpected about the lower investment levels because the venture industry has been consolidating, with a smaller number of firms raising less capital. VC fund-raising over the past decade peaked in 2006, when NVCA data shows that 236 VC firms raised almost $31.2 billion from college endowments, pension funds, and other institutional funds. In 2012, 189 firms raised more than $19.4 billion.

Taylor said a couple of other factors also are contributing to the slowdown: VC firms are providing less funding in capital-intensive sectors like cleantech and life sciences, especially in first-time deals; and VCs are investing smaller amounts in more Internet and software deals.

“One place where we did see an increase was in companies that are in later-stage rounds,” Taylor said. To him, it’s an indication that more venture-backed companies are planning IPOs. “Our hope is that as companies come off their 2012 audits that they are starting to put their S-1 [IPO] filings together to go public,” Taylor said. “We expect to see a large number of companies go public this year.”

Under securities reforms adopted just over a year ago, companies also can now submit their IPO filings confidentially for regulatory review. About 175 IPO filings have been submitted to the Securities and Exchange Commission under the new provision so far, according to testimony submitted last week by two SEC officials to the House Subcommittee on Investigations, Oversight and Regulations.

“That’s a lot,” Taylor said. “A lot of companies are looking to go public. VCs want to get their cash out. A lot of [venture-backed] companies would have been considered good IPO candidates two, three, four years ago, and they’ve just been waiting for a good market.”

There have been 44 IPOs since the beginning of the year, according to Renaissance Capital, a firm in Greenwich, CT, that provides institutional research about IPOs and new public companies. That’s below the pace of IPOs at this time last year, but the $11.1 billion of total capital raised is ahead of last year’s pace. Not all of those IPOs were venture-backed companies, however.

The downward trend highlighted in the first quarter of the MoneyTree Report is at odds with findings released last week by the New York data firm CB Insights, which found that first-quarter venture funding remained steady in comparison to the previous quarter, and was up over the same period a year ago.

But the same downward trend was reflected in data released yesterday by Dow Jones VentureSource, which also found that U.S. venture funding fell during the first quarter. VentureSource said nearly $6.4 billion was invested in 752 deals—a 12 percent decline in dollars and an 11 percent drop in deals compared with the same period a year ago, when VentureSource said $7.2 billion was invested in 848 deals. The first-quarter numbers also were down compared with the previous quarter, when almost $7.2 billion was invested in 800 deals, according to VentureSource data.

Funding for software startups was a bright spot during the quarter, when venture firms invested $2.3 billion in 329 companies nationwide, according to MoneyTree data. That was a 35 percent increase in funding and a 19 percent jump in deals from the previous year, when VCs invested $1.7 billion in 276 software startups.

Venture funding for Internet-specific deals remained fairly steady, with $1.36 billion invested in 136 deals during the first quarter. In the year-ago period, VCs invested $1.5 billion in 206 deals, according to MoneyTree data.

Venture funding for biotechnology startups amounted to $875 million in 96 deals during the first quarter, down slightly from the $892 million invested in 118 biotechs during the first quarter of 2012. However, it was down sharply from the previous quarter, when VCs provided $1.3 billion in funding for 138 biotech startups.

The NVCA’s Taylor said he was heartened by the 445 seed and early stage venture deals, which accounted for almost 52 percent of the 863 deals counted during the first quarter. The $1.6 billion invested in seed and early stage startups accounted for about 28 percent of the total $5.86 billion that VCs invested across all sectors.

The Top 10 Deals, according to the MoneyTree Report:

1) Genband: Frisco, TX; Networking and equipment; $343.5 million

2) Air Watch: Atlanta; Software; $200 million

3) Pinterest: San Francisco; Media; $200 million

4) LivingSocial, Washington, DC; Consumer; $110 million

5) Nest Labs: Palo Alto, CA; Consumer; $80 million

6) AppNexus, New York; Software; $75 million

7) Intrexon; Blacksburg, VA; Biotechnology; $64.4 million

8) Domo: American Fork, UT; Software; $60 million

9) PTC Therapeutics: South Plainfield, NJ; Biotechnology; $60 million

10) SevOne: Wilmington, DE; Software; $60 million


Bruce V. Bigelow was the editor of Xconomy San Diego from 2008 to 2018. Read more about his life and work here. Follow @bvbigelow

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