January 29, 2011
VC investment in 2010 increased over the prior year for the first time since 2007 according to a numbers released by the NVCA and the PWC MoneyTree survey. Looking at the results begs the question; have we hit bottom or is this just a dead cat bounce? VCs invested $21.8 billion, an increase of 19% investing in 3,277 companies, up 12% over 2009. Interpreting the near term future of VC investing varies depending on whether you are a member of the Glass Half-Full or Half-Empty club.
Since 1995 there have been two boom-to-bust VC investment cycles since. The first cycle lasting 9 years starting in 1995, peaking in 2000 and bottoming out in 2003. The second cycle lasting 7 years beginning in 2003, peaking in 2007 and bottoming out in 2009. In the 1995 cycle investments rebounded and continued to increase for 5 successive years. The second cycle saw sustained investment growth for a period of 4 years.
Was 2010 the start of a rebound or is it the hump of a double dip? Dollars invested last year were the 6th lowest amount in the last 16 years. Last year’s year-over-year increase was 16% which was significantly less than the 30% increase in 1996 and slightly more than the 13% increase during the rebound that started in 2004. As rebounds go, 2010 fits between the norms of the last two cycles.
Looking at the numbers by sector, the strongest growth sector was the red hot Clean Tech industry which brought in 76% increase in investment capital over the prior year. The Clean Tech category crosses traditional MoneyTree industries and comprises alternative energy, pollution and recycling, power supplies and conservation.
Democrats weren’t the only entities feeling the negative effects of controversial healthcare reform. The Medical Device and Biotech industries joined the Networking Equipment sector as the lowest growing sectors for the year. Medical Devices saw a 9 percent drop in funding while Biotech saw a slight increase of 3 percent. Healthcare Services however bucked the Healthcare-reform-bad-karma-trend by doubling over the prior year to $273 million. Networking saw the steepest percentage drop of any industry at -18 percent.
The top regions in terms of dollar increase were both in California. Eight hundred pound gorilla, Silicon Valley and Los Angeles saw increased investment of $1.2 Billion and $630 million respectably. LA had the largest percentage increase of all regions with investments rising 66 percent. Another California region, San Diego was the biggest loser in the survey with investments dropping 10% or nearly $100 million.
IPOs and M&A tend to foreshadow venture investment. Last year’s robust IPO and M&A coupled with this newly released data documenting a bounce from the VC investment bottom of 2009 just may be the empirical evidence that Venture investors require to re-enter the market. Then there is the anecdotal evidence like the former VC who recently told me he’d been asked to get the band back together for a reunion tour. Or the DC tech entrepreneur who told me that he turned down a $5 million investment on an $8 million valuation in start-up that was producing just over $1 million in revenue. Whether you think the market is coming back or not, there are over 3 thousand companies who finished last year flush with $22 billion dollars that seem to say there is gold in them there hills. We can only watch and wait to see if this is the start of another sustained bullish cycle of investment growth for start-ups or if the cat has bounced.
Editor’s Note: Guest author Glen Hellman is an angel investor, serial entrepreneur, and works for venture capitalists as a turn-around specialist. He muses on his blog and works with entrepreneurs to help them figure out what to do and get them to do it. He’s a principal at Driven Forward, member of the board at The University of Maryland’s Dingman Center for Entrepreneurship and is a mentor at the Founder Institute, which is a good excuse but not the reason he is such a horrible hockey player.
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