Global venture capital insights and trends report 2011
Venture capital perspectives - US
"Large US corporations are recognizing that they need to partner with VC ﬁrms and their portfolio companies to access external innovation." Bryan Pearce
Americas VC Leader, EY
- Despite strong deal ﬂow, market volatility has had an impact on the ability of all but the very best VC ﬁrms to raise new funds. In 2011, total capital raised for US venture ﬁrms reached US$32.6 billion, a 10% rise from the same period a year ago. However, the number of ﬁrms that closed fell to 19 funds, a 38% drop from a year ago. (In 2010, the total US VC investment was US$29.6 billion.)
Overall, VC fund-raising continues its almost decade-long decline. While current fund-raising surpasses levels prior to the dot-com bubble years (pre-2000), it has not yet returned to levels reached in the 2000–08 time frame.
- Seven well-known VC funds raised most of the capital in 2011, as wary limited partners invested less and in only a few VC ﬁrms. Top VCs were primarily early investors in areas such as social media. And 2011 marked the fewest number of US funds closed in 18 years, with just 135 and amount closed of US$16.2 billion.
- The US still maintains an approximately 70% share of the global VC market, followed by the UK, Beijing and Shanghai. Globally, the top four regions in the world with the most VC activity were all in the US: Silicon Valley retains the lead by far (US$12.6 billion, 977 rounds), followed by New England/ Boston (US$3.8 billion, 369 rounds), the New York City metropolitan area (US $3 billion, 367 rounds) and then Southern California (US$3.3 billion, 286 rounds).
However, all of these US hotbeds have experienced a decline in the number of active investors.
US VC investment, 2005–11
Fund-raising is shifting toward later-stage
- Many VCs show reluctance to invest in early-stage untested companies. They are altering their investment objectives, seeking greater ﬂexibility, growth equity opportunities and later-stage deals. The average fund size substantially increased in 2011, to US$140 million.
Companies in the expansion and later stage of development received most of the funding during 2011. A total of US$18.7 billion in funding was split between 1,103 later-stage companies.
- Nevertheless, the seed/early-stage market is still active, thanks largely to highly valued internet companies. The relatively small amount of capital now required by start-ups due to innovations such as cloud computing has lowered operating costs dramatically, effectively allowing companies to prove their products on far less initial capital.
In 2011, 1,339 companies received a total of US$5.8 billion in ﬁrst-time ﬁnancing (an increase of 7% in capital raised and a increase of 19.5% in deal numbers, compared with the same period in 2010).
Companies are staying private longer
- Angel investors are ﬁnancing many of these early-stage companies, particularly in digital- and mobile-related investments. Subsequently, such angels' investments are often written up signiﬁcantly or acquired for an attractive investment multiple. The proliferation of angel investors is helping ﬁll the void left by the consolidation of VC ﬁ rms.
- The super angel phenomenon involves former executives from high-proﬁle consumer internet companies who have invested personal capital in companies at the seed stage. Several of these investors recently raised small institutional funds (typically less than US$75 million) to invest in about 500 start-ups in Silicon Valley over the past 18 months.
- The average time a company remains private has roughly doubled in recent years. As some highly successful companies refrain from pursuing an IPO for much longer than used to be the norm, this has led to the rise of private secondary stock markets, which provide early investors and employees a chance to sell out before an IPO. This has reduced the need to go public because liquidity needs have been lessened.
- The rise of more liquid private exchanges reﬂects a big change in ﬁnancing sources. For instance, the inﬂated frothy valuations in the tech market have been forming largely out of sight in private markets. Professional investors are putting billions in private capital into late-stage investments, such as social media businesses like Facebook and Groupon.
They are enabled by private exchanges such as SecondMarket (see interview on page 18) and SharesPost, which allow investors to trade the equity of private companies more efﬁciently.
Key US VC statistics
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