“And Now For the Rest of the Story…”

Tuesday Mar 4, 2014 by Michael Greeley - General Partner, Foundation Medical Partners

Spent some time this weekend looking at the recently released 4Q13 investment data compiled by the National Venture Capital Association/PricewaterhouseCoopers/Thomson Reuters in their “MoneyTree Report.” The report tracks, by stage/sector/geography, where investment dollars are flowing but it also provides insight to broader themes and implications.

In general 4Q13, at least on the surface, looked like a strong quarter as $8.4BN was invested in 1,077 companies which was in line with prior quarters. The 4Q13 was 28.5% and 27.0% of the dollars and deals for the full year ($29.4BN and 3,995, respectively), which is consistent with prior years as there is always a flurry of year-end activity. There was reasonable diversity of stage of investing in this past quarter as well with Seed/Early Stage taking 39.4% of total dollars invested, Expansion Stage and Later Stage were 35.8% and 25.8%, respectively (although interestingly the proportion of Seed investing seems to be declining over the last number of quarters – so maybe some rotation to Later Stage, or at least instead of classic seed rounds, we seem to be seeing greater incidence of Early Stage financings – suggesting entrepreneurs are taking more capital to start). Emerging from the Great Recession over the past four years the total number of VC financings on an annual basis has consistently been between 3,700 and 4,000 – nice to see some stability.

The average size of Seeds in 4Q12 was $2.6M but spiked to $4.8M in 4Q13 – clearly round sizes are increasing which may be an acknowledgment that seeds just don’t get you far enough or increased investor confidence. Early Stage round sizes increased from $4.4M to $5.5M over those same periods, while Expansion ($9.0M to $10.9M) and Later Stage ($10.5M to $10.1M) remained relatively flat.

Given the reams of data in the report there is a risk of missing some key trends but here are some items that jumped off the page for me…

  • Overall dollars invested increased 7.5% from 2012 to 2013 – that is pretty extraordinary growth (although the number of deals increased only 3.6% underscoring the larger round size phenomenon) – over all stages, the average round size in 4Q13 was $7.8M, which frankly is relatively meaningless but it was only $4.2M 20 years ago – and this in an age of Lean Start-up!
  • “First time” financings were 19.3% in 4Q13; twenty years ago that was 49.6%, perhaps suggesting that entrepreneurs have lessened their dependence on VC’s for financing. In the depth of the Great Recession, that number was 21.8% which I had expected would have been meaningfully greater as VC’s became the financier of last resort.
  • Healthcare (biotech/services/devices) in total was 33.5% of the dollars invested yet only 15.7% of the companies in 4Q13; in 4Q12 those numbers were 23.9% and 12.8%, respectively. VC’s are directing greater amounts of dollars toward healthcare (and the data do not separate out healthcare IT which would arguably add to the increased investor enthusiasm). The average size of the healthcare investments was $10.0M as compared to $4.7M for all 4Q13 investments.
  • Ready for profound insight from the data? Interesting (troublesome) trends emerge when looking at the regional data – and not just the tiresome Boston vs Valley debate (or now the New York/Boston debate). In 4Q13 Silicon Valley consumed 38.5% of all dollars invested versus 14.6% for NY Metro and 11.0% for New England (those numbers were 40.2%, 11.7% and 13.1% in 4Q12, respectively). Those three regions consumed 64.1% of all VC dollars in 4Q13; in 1995 that was 38% and ten years ago it was 57.3%. Are we seeing a bifurcation of innovation across the country (“haves and have nots”) in parallel to what we are seeing with the extraordinary disparity of family income? Clearly VC is increasingly a coastal phenomenon which does not at all take anything away from the very strong regional VC markets in the middle of the country – the implication of this VC dollar migration is something not well understood yet for our national economy.
  • Corollary to the above profound insight: 24 states in this great country had 3 or fewer reported VC deals in 4Q13 – almost half of the country! There were 6 states which had zero…nada…zilch VC deals (Iowa, Idaho, Kentucky, Maine, Montana, South Dakota) in the reported data (actually I find this hard to believe but the direction of the point remains intact).
  • The top 10 deals in 2013 consumed 6.8% of all dollars invested last year and only one of those was healthcare. In the 4Q13, the top 10 deals captured 14.9% of the $8.4BN invested and three of those were healthcare deals.
  • Head Scratcher – earlier this year the same three organizations announced that $4.9BN had been raised by VC firms in 4Q13 bringing the total for 2013 to $16.7BN (versus the $29.4BN invested). This amazes me and is now the fifth year when the VC industry has raised meaningfully less capital than it invests. Clearly this is not sustainable. Clearly other investors have stepped into the breach and joined these investor syndicates (strategics, angels, hedge funds) in an amounts not well understood – is this good? Is it bad? Arguably having the capital gap filled by investors who may not be accustomed to the vicissitudes of the VC asset class is problematic – but having said that they seemed to have hung in through the Great Recession! At some point though the amount invested and the amount raised need to come back in line.

Note to self – I need to poke around some more at the VC fundraising data.  Investors who watch my industry closely are extremely excited about this phase of the cycle so I expect to see stepped up fundraising activity – certainly in light of the extraordinary liquidity we are now witnessing.

 

Michael Greeley is a General Partner at Foundation Medical Partners.  You can find this post, as well as additional content on his blog called On the Flying Bridge.

 

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