Facing unstable global markets and an upcoming presidential election, venture capitalists took a more disciplined approach to their investments in 2012 than in previous years.
Results from a MoneyTree report in partnership with the National Venture Capital Association (NVCA) found that investments totaled $26.5 billion in 2012, with VCs closing 3,698 deals. This is a 10 percent decrease in dollars and a 6 percent decline in deals over the prior year.
Tracy Lefteroff, global managing partner of Pricewaterhouse Cooper’s venture capital and private equity arm attributed the decrease to unstable markets and “taxes, government policy, the general environment in the stock and equity markets, troubles in life sciences, [and] the regulatory market” in a call with press and analysts.
However, investors and financial analysts agree that there is cause for optimism in 2013. For the fourth quarter, venture investment of $6.4 billion into 968 companies fell 3 percent in dollars but rose 5 percent in deal volume over Q3 2012. With the re-election of President Obama and burgeoning excitement about the JOBS Act, deals kicked into high gear.
Mark Heesen, president of the NVCA, said there would be a decline in “me too” investments in 2013, meaning that VCs won’t just follow the herd. With the industry facing constriction, “more seasoned entrepreneurs” will get funding over 20-something Internet wunderkinds.
In addition, the experts anticipate a steady pipeline of high-profile IPOs in 2013, particularly in the business-to-business (B2B) software sector. Research firm CB Insights predicts that 80 percent of the companies in a position to go public target their products at businesses rather than consumers.
Indeed, software is the only sector to see a steady increase in venture capital dollars, while biotech and life sciences, clean-tech and consumer products and services, failed to capture VC attention in the final quarter of 2012. Investment dollars rose 10 percent over 2011 to $8.3 billion, which funded 1,266 software deals.
This represents the highest level of investment in the software sector in over a decade.
It seems the reports of a “series A crunch” have been exaggerated. For the fourth quarter, early stage investments increased 5 percent in dollars and 9 percent in deals over the previous quarter.
Investors on the call, including John Backus of New Atlantic Ventures, said there were a healthy number of companies receiving first-round financing. Seed deals are notoriously difficult to track as family and friends often privately invest. “I don’t believe we had a series A crunch,” said Backus, who said he witnessed an “angel feeding frenzy.”
With entrepreneur-friendly government regulation and high-quality late stage companies on the cusp of going public, VCs expect to see solid returns in the coming year. “It’s a terrific time to be investor,” said Jim Healy of Sofinnova Ventures. ”We expect to be highly active in 2013.”
The quarterly Moneytree report is issued by PricewaterhouseCoopers and the NVCA, with data collected by Thomson Reuters. The full report is available online at NVCA.org.