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Posts Tagged ‘Nvca’

It Was a Turbulent Couple of Years But Startups in Q4 ‘09 Prospered

While 2009 continued a downward trend as one of the worst recessions in U.S. history, the decline for venture-backed mergers and acquisitions has not been as severe as the dot-com bust in 2001 and 2002.

New figures from the National Venture Capital Association show that in the last quarter of 2009, M&A hit $7.8 billion, up from the previous year’s mark of just over $2 billion. Overall, 2009’s total of $12.6 billion could not match 2008’s $13.6 billion total.

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Mergers and acquisitions totaled over $68 billion in 2000, only to fall below $8 billion by 2002 following the bursting of the dot-com bubble. In contrast, 2007’s M&A total of $29 billion has declined to just over $12 billion in 2009 – a much more smooth rate of decay which has begun to flatten out.

Mark Heesen, president of the NVCA, says they expect to see continued improvement throughout 2010. “Clearly, we have a long way to go towards a full recovery but we are encouraged by the increasing acquisition values and the number of companies that have filed a registration with the SEC to go public,” he says.

A late boost in the fourth quarter of 2009 has helped startups from reliving the experiences from earlier in the decade, the largest of which came from Amazon’s July purchase of Internet shoe seller Zappos for $930 million. This acquisition helped internet specific purchases climb to $2.2 billion in Q4 2009 – a near seven-fold increase from 2008’s final quarter.

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VC will ride out of the downturn on health care, fintech and online ads

The first quarter of 2009 saw venture capital investments hit a 12-year low, according to a report from PricewaterhouseCoopwers and the National Venture Capital Association (NVCA). While investors are still wary about making new investments as the economy slowly begins to correct itself, venture capital will no doubt reemerge as the preeminent source of financing in the technology and life science industries.

Ultimately, a shift in the way consumers use the internet will serve as the major catalyst for increase venture capital interest in certain technology sectors. With the advent and growth of collaboration tools on the web, new technologies geared toward project management among companies and groups will become better developed for both enterprises and average consumers.

There are three main sectors in technology that will become hot spots for venture capital funding moving forward: Health care information technology, financial software and online advertising.

Health care IT will continue to gain speed, especially if president Obama passes his health care reform package. With new government regulations on the horizon, opportunity for compliance systems will grow exponentially. New processes that have long been completed manually will be automated, and the prospect of using shared platforms for record keeping and other data exchange will only increase companies’ appeal to investors.

Firms seeking opportunities in health care will be diligent about the details. Today, the focus is on treating chronic diseases. Moving forward, we’ll see a sea change from drugs and devices used to treat diseases and their symptoms to preventative care and awareness campaigns. As such, investors will likely be targeting diagnostics, specialty pharmaceuticals, regenerative medicine and preventative devices. The companies that do the most to prevent diseases and reduce health care costs accordingly will come out the winners in the venture capital game.

Improved collaboration will also cast the spotlight on financial technology, or fintech. Enhanced information sharing tolls can be used to create best practices that will, in turn, reduce costs, improve efficiencies and bolster the whole financial services sector.

Finally, online advertising will see a surge in venture dollars due to increased internet-based sharing. We’ve already seen advertising shift dramatically to new media in the last few years. And with this new emphasis on collaboration, companies will be able to more easily see others’ successes and mirror their efforts. Measuring successful ad returns quickly and accurately will also drum up investor interest in a big way.

In all three of these sectors, investors will be giving preference to companies that have more cost effective ways of getting products to market. From now on, comparative effectiveness research (CER) will require companies to demonstrate how efficient they are at this, and based on these results, set prices for reimbursements. For example, those that can reduce the current overwhelming costs of health care, or who can produce the same (or better results) at a lower cost will hit the sweet spot for most venture firms.

In addition, both technology and life sciences will be impacted by strategic themes that will eventually drive growth and attract VC financing. For instance, many technology platforms are migrating to newer technologies with changing cost structures at the same time that many medical treatments are moving from generalized to personalized medicine.

Also, many existing technologies are reaching the end of their lives or patent protections. As a result, many businesses based on once-novel innovations are now facing consolidation and other competitive pressures. Most important is convergence; information technology will increasingly merge with life sciences. Right now, diagnostic test makers are partnering with therapeutics providers to increase efficacy and safety.

The economy isn’t going to repair itself — nor is the government going to be able to fully turn it around. But, when the time is right, new, smart enterprises will begin to flourish, and venture capitalists will be ready to lend the most promising and viable among them enough financing to get them through the remainder of the slump.

James A. Datin is executive vice president and managing director, life sciences group of Safeguard Scientifics. Kevin L. Kemmerer is executive vice president and managing director, technology group of Safeguard Scientifics.

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Only 17 venture capital firms raise money in Q3 — fewest in 15 years

Venture capitalists are a breed in decline.

Just 17 venture capital firms raised new funds in the third quarter of 2009, the smallest number of number of firms in any quarter since the third quarter of 1994, according to new data released by Thomson Reuters and the National Venture Capital Association (NVCA).

While venture capital firms typically raise money every three or four years, and so a single quarter represents only a snapshot, the historically speaking very low number of firms raising money shows just how much of a crunch the industry is in right now.

We’ve talked about the reasons before: Venture firms saw their heyday in the late 1990s when international investors rush to give them money, lured by the impressive profits produced by the Internet boom (including the IPOs of companies from Cisco to eBay). But the surge of new VC entrants meant more competition, which lowered the overall profits, and we’re seeing the fallout now.

Only $1.6 billion was raised by the 17 firms in the third quarter, which is the lowest level of dollars committed since the first quarter of 2003 when $938 million was raised.

However, this may represent the bottom. “Anecdotally we are hearing that fundraising activity is accelerating as more firms that were waiting for economic recovery are beginning to formally seek commitments,” said Mark Heesen, president of the NVCA. “The reality, however, is that many limited partners are still determining their long term strategies in wake of the past year’s financial crisis and that slows the process down considerably. We expect commitment levels to remain modest for the remainder of 2009 with gradual increases beginning in 2010.”

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What Have VCs Really Done for Innovation?

This is a guest post by Vivek Wadhwa, an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Executive in Residence at Duke University. Follow him on Twitter at @vwadhwa.

Back in 1986, when Bill Gates was still making sales calls, he pitched my group at First Boston on why we should bet the farm on Windows. Despite the risk involved, we gave his fledgling startup the deal. This wasn’t because of his financial backers (he didn’t even drop any names), but because we believed in his vision and nerdiness. In the same way, Google became a huge success long before the deep pocketed VC’s arrived to ride Larry and Sergey’s coattails. They simply had a great technology and winning strategy.

So I’m miffed by the National Venture Capital Association’s (NVCA) claim that companies like Microsoft and Google “…would not exist today without the funding and guidance provided during their early stages by venture capitalists.” And I’m amused that the NVCA claims credit for creating 12 million jobs and generating $3 trillion in revenue (that’s only 21 percent of U.S. GDP). In the software industry (which includes Internet/Web 2.0), they stake claim to 81% of the all jobs created. Yes, 81%. Can they please give the entrepreneurs who risk their life savings, max out their credit cards and put their families in the back seat a little more credit? We’re not talking about divvying up the company’s stock here, just a pat on the back.

How’d they come up with these numbers? They added up all the revenue generated in 2008 by any company a venture capitalist ever invested a dime in. So if John Doerr bought Bill a lunch in 1985, they’d count Microsoft as part of their empire. Maybe I’m exaggerating a bit. But seriously, the NVCA numbers aren’t even remotely credible. How can VCs claim credit for the revenue of a company which they cashed out of twenty or thirty years ago? And even then, claiming credit for 81% of tech jobs and 21% of GDP? More to the point, would those jobs never have been created if the VCs had never appeared on the scene? How can the NVCA prove causality?

The answer is, the NVCA can prove nothing and a growing pool of data suggests that VCs at best have little to no impact on these companies and at worst have a negative impact. I just completed a research project in which we interviewed the founders of 549 successful companies in several high-growth industries – the ones VC’s are most likely to fund. We selected companies that had made it out of the garage and were generating real revenue. Guess what? Hardly ten percent of the serial entrepreneurs took venture money in their first startups. In their subsequent launches, the proportion who took venture money went up to a quarter. In other words, three-quarters of even the most experienced entrepreneurs didn’t rely on venture capital (new report to be released in October).

NVCA claims that VCs created entire industries like biotech and turned the software development and semiconductor industries “…into prime drivers of the U.S. economy.” I am a big fan of Vinod Khosla’s and believe he is a real pioneer. But he is the exception rather than the rule. The fact is that VC’s follow innovation, they don’t lead. They go where they smell blood.

The correlation between venture capital investments and productivity growth was researched by Masako Ueda, a professor at University of Wisconsin-Madison. She analyzed total factor productivity (or TFP, which is a measure of innovation) in several industries. She found that VC investment actually lagged behind TFP growth by two years and later rounds of VC investments actually caused a decline in TFP. In other words, venture capital slowed down the innovation process. What’s more she found that delayed TFP growth is correlated with first round VC investment. In simple English, this means that money goes where the innovation is, not the other way around.

The NVCA report also touts all sorts of statistics about how their investments outperformed the overall economy. But this isn’t what Kauffman Foundation’s Paul Kedrosky found when he researched the Inc. 500 list of the fastest-growing private companies. His study determined that from 1997-2007 venture industry lagged the small-cap Russell 2000 Index by 10 percent (this includes returns from the dot-com hey-days). What’s more the study found that only 16 percent of these 900 companies had venture capital backing. And less than 1 percent of the 600,000 new employer businesses created in the United States every year obtain venture capital financing.

What’s behind the NVCA’s voodoo economics? Even though they vehemently deny it, VCs are looking for bailout money and tax-breaks. After spending so much time, energy and breath in the past decade arguing that government subsidies distort markets, now the wealthy, bloated VC community wants its own handouts.

My VC friends complain over drinks about a new breed of VCs who are crowding out the really smart and experienced. These gold digger VCs bear MBAs and have no real operational experience but plenty of taste for IPOs. (Interestingly, if they don’t have an MBA, they have a law degree. Go figure.) With all this dumb VC money sloshing through the system, VCs end up funding hordes of “me-too” companies. This leads to declining returns and high startup failure rates. Everyone loses.

What we need to do is to apply the same rules to VC’s which they impose on their companies – force them to make tough choices and get their business models in order. And instead of giving the tax-breaks to the middlemen, let’s give these directly to the entrepreneurs who take the risks and create the innovation. It is the entrepreneurs who fuel the economy, not the venture capitalists or investment bankers.

Crunch Network: CrunchBoard because it’s time for you to find a new Job2.0

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