Global VC insights and trends report 2012

EY’s global venture capital insights and trends report 2013

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2012 was a challenging year for venture capital investment but early signs for 2013 suggest a better year ahead.

Following a year in which activity declined to its lowest levels since 2009, we believe that steadying economic conditions will bolster investor confidence and increase risk appetite. This and the prospect of better exit opportunities ahead could make 2013 a more positive year for venture capital.

Report highlights:

Improving trend in activity reverses in 2012

  • In 2012 global VC investment declined by 20%, the number of VC investment rounds by 8% and the average round size decreased by US$1.2m. Furthermore, the number of fund closings declined by 13% year-on-year, with the dollar amount closed falling by 31%.
  • In the face of uncertainty, the market is becoming more consolidated, with only the stronger players continuing to actively invest.
  • Lack of exits hampering investment cycle

  • The number of VC-backed IPOs and M&A exits was down in 2012. The amount raised via IPO declined globally by 27% from US$22.1b in 2011 to US$16.1b in 2012. At the same time, VC-backed M&A activity declined by more than 20% to 618 deals.

Realignment of the VC model to later stage

  • VCs are increasingly directing investment at the generating revenue stage and focusing less on product development, pre-revenue business – seeing this as a less high risk option.
  • This trend toward later and smaller investments in less risky companies is being accompanied by a move to tougher terms.

The increasing role of corporate venture and M&A

  • Corporate venture investing is rising and surpassed pre-dotcom levels in 2012. Corporates are keen to invest in and acquire venture-backed companies to fill the in the gaps in their strategy and innovation capability.
  • Investments, which tend to be focused in the US on later stage businesses, generally have a positive impact.
  • Competition for high quality deals is fierce. VCs are competing with each other and with other sources of capital. Establishing a robust VC value proposition for investee companies is a must-do strategy.

Key global venture insights

  • VC investment remains strongest in the US and Europe – falling only 15% in 2012, compared to more than 40% in Israel and China. However China had the highest median round size at US$19.9m in Beijing, and India was the only country to see an increase in the number of investment rounds.
  • 2012 saw VC-backed IPOs fall globally – apart from in the US where Facebook’s IPO saw market proceeds double.
  • In 2012, global median pre-money valuations dropped in 20% in the US, nearly 50% in Europe and almost 40% in China.