EY - Global venture capital insights and trends 2014

Global venture capital insights and trends 2014

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2013 was a solid year for global VC investment with an exceptional fourth quarter – signaling an even stronger year for venture capital in 2014.

Improving economic conditions and growing levels of liquidity combined with higher investor confidence and a more positive exit environment were the primary drivers underpinning solid global VC activity in 2013. Growth towards the end of 2013 in the US economy, which accounts for 68% of global VC activity, augurs well for 2014 as do the substantial rebounds in Europe and Israel and the reopening of capital markets in mainland China.

Report highlights:

Key trends reveal a global venture funding ecosystem growing in strength

  • New technology has enabled funding mechanisms such as crowdsourcing which are transforming the environment for the very early seed and start-up stages.
  • Angel participation at the startup stage in US has almost doubled and in Europe it's risen over 500%.
  • Corporate investors are pioneering new ways to collaborate with fast growth businesses and VCs.
  • Governments in many countries are also taking the steps that enable entrepreneurial businesses to thrive.

Emerging markets post higher median round size in later rounds and stages

  • Across all markets, median deal values in the seed and first round classes fell or saw little change from 2012. This confirms the global pattern that most VCs prefer to make bigger investments after the second investment stage when companies are perceived to be partially de-risked.
  • As expected, second and later stage investment rounds continued to see relatively high median deal sizes across all geographies in 2013.

Exit environment challenging

  • Globally, there was both a decrease in number and value of VC-backed exits by IPO in 2013 with 14% of VC portfolio companies exiting via IPO. The global number of VC-backed M&A exits also fell.
  • Median valuations pre IPO and M&A rose across all markets, indicating a broadly positive environment going forward.

Later stage VC investing dominates, but angel participation grows

  • In 2013, VC investment in companies at the revenue-generation stage continued to dominate in terms of number of rounds and the proportion of VC investment.
  • Angel investors are becoming more significant and better organized, expanding their presence at the start-up stage as VCs become more risk averse and shift their attention to later stage investments.

VC prefers industries with a fast route to value

  • Favorite sectors for investment globally are consumer services and information technology. Consumer services has a direct connection with consumers that offers rapid feedback on whether investments are likely to pay off. Information technology also enjoys much shorter cycle times from investment to revenue generation often of around six months.

Governments playing a crucial role

  • Entrepreneurs say the second-most important funding source after bank credit for fueling entrepreneurship is public aid and government funding, according to the EY G20 Entrepreneurship Barometer.
  • Evidence suggests that the provision of government-sponsored funding improves a company’s ability to access debt and other financing, creating a multiplier effect.

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