When looking to start a potentially venture-backed company, it’s important to check the numbers to see if VCs are more or less likely to invest their funds. Back in January, we proposed that venture capitalist investments could see a bump in early 2010 thanks to increased fund raising at the end of last year. New data from the National Venture Capital Association, however, shows that in the first quarter of this year, VC investment has been modest at best, dropping slightly from the previous quarter, but starting stronger than 2009.
In a report completed in cooperation with Thompson Reuters, MoneyTree and PricewaterhouseCoopers LLP (PwC), the NVCA reported last week that $4.7 billion was invested in 681 deals by venture capitalists in Q1 2010, falling 9% and 18% respectively from the final quarter of 2009. The dip in activity is, however, still a stronger start to the year from last year when just $3.4 billion was invested in 635 deals. Though activity dropped from last quarter, the average deal size grew $650,000 from $6.25 million per deal in Q4 2009, to $6.9 million per deal this year.
NVCA president Mark Heesen says the first quarter data “bodes well for the remainder of the year,” but still sees a slow and steady climb is in the near future of the VC community.
“With health care reform passed and an improving exit market, we are expecting venture investment to increase moderately throughout the rest of 2010,” says Heesen. “However, we still anticipate investment levels to mirror that of the mid-1990’s as many venture firms will be focused on fundraising this year.”
It seems the VCs were more careful and more focused with their investments this quarter. Less money was spent, but more money went into each investment. A looming consolidation of VC firms is likely creating a scenario in which the investors want to exercise more caution than usual as to avoid spreading themselves thin and collapsing. While our January prediction didn’t completely come to fruition, the VC investment scene certainly took a baby-step forward toward a brighter future.
Just as it is much easier to gain weight than it is to lose it, the VC community is quick to drop investment spending and slow to bring it back. So like someone trying to shed some pounds to fit into their swimsuit this summer, slow and steady will likely win this race as venture investments crawl out of their economic slump.
After the dot-com bust in 2000 and 2001, it took until the end of 2007 for VC investments to return to “normal” (only to fall again with the recent recession). So riding the boom and bust cycle, it looks like we could be in for another slow and steady climb over the next 6 to 8 years (so yank all your stocks around 2016).
Previous first quarter data from 2010 has been hitting extremes, as we saw the slowest opening quarter for VC fund raising in 17 years, as well as record high M&A numbers. This data, on the other hand, splits the difference of the extremes and is a modest dip. For those entrepreneurs champing at the bit to found a startup, now may as good a time as ever to go out and seek venture funding as VCs will likely be less selective and less cautious over the course of the year.
