Venture Investing Fell In 2012 And More Caution May Be Ahead

Venture investing fell in 2012 for the first time in three years as global economic uncertainty combined with a soft fundraising environment to spark caution in the general partners.

U.S. investors poured money into software and Internet startups at levels nearly unseen in a decade, but scaled back funding for life sciences and cleantech companies at a significant pace due to regulatory hurdles and weak exit markets for green companies.

The restraint will probably continue this year. “It’s likely we’ll see fewer dollars invested in 2013,” predicted Mark Heesen, president of the National Venture Capital Association, on a conference call. “There will be fewer me-too deals.”

The year is the fifth in a row where investments made have exceeded money raised.

For 2012, venture capitalists put $26.5 billion to work in 3,698 deals, a decline of 10% in dollars and 6% in deal flow, according to the MoneyTree Report released Friday by PricewaterhouseCoopers, the NVCA and Thomson Reuters, publisher of this blog. For the fourth quarter, $6.4 billion went to 968 deals, a 14% decline in dollars from a year earlier, the report found. Average quarterly deal size was the lowest of the year at $6.6 million.

The top investment category for the year was software, where $8.3 billion went to startups, the most since 2001. Internet companies received $6.7 billion, down 5% from last year, but the second highest dollar total also since 2001.

On the other hand, biotech and medical devices investing slumped 14.5% and cleantech investing tumbled 28% in dollars, the MoneyTree Report found. For the fourth quarter, cleantech investors put $535 million in startups, down 59% from a year ago.

The top five deals of the year were:

  • SquareTrade, which raised $238 million;
  • Square, which raised $200 million;
  • Intarcia Therapeutics, which raised $155.9 million;
  • Fisker Automative, which raised separate rounds of $147 million and $129.7 million; and
  • Sapphire Energy, which raised $139 million.

In a separate study, PitchBook put the 2012 venture investment total slightly higher at $27.8 billion, down 19% from 2011. It said a slow second half pulled down investing along with a 50% decline in the number of venture deals of $100 million or more.

Photo courtesy of Shutterstock.

2 Comments

  • Couldn’t the decline in investments simply mean that the quality of deals has declined. What I mean by this would be what some call subprime investments. I just refer to them as clones whenever I blog about the subject. One of the problems that I see is investing in the tail end of a trend. A trend begins and those who get in early, do well. Those who are trying to pattern after early successes begin to invest in companies comparable to the earlier exited. Valuations went up as a partially as a result of a flawed comparable universe. Someone takes a look at similar companies and makes decisions based on the large successes rather than some of the smaller ones. So these clones receive higher valuations in years past, but in 2012, some investors start to realize that those weren’t paying off. So now in 201, begins another phase of seeking out…well, I mean waiting on.. quality dealflow to come their way.

    I believe that recent Fred Wilson post sort of touched on this also. He basically said he didn’t see anything he wanted to invest in over the past year or so.

  • Yes, you are right. Deal quality could be a component of the decline. VCs do invest in a lot of me-too companies. However, the decline was broad based during the year. Late stage, expansion stage, early stage all fell. If VCs found that newly formed companies were uninteresting, I would expect to see a greater fall off in early stage.

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