Since turning the page to 2011, now might be a good time to take stock of the VC funding environment. By all accounts, the startup ecosystem “feels” like it has fully rebounded from its post-Internet bubble lows, with major news outlets reporting healthy valuations for mature tech companies, a robust M&A market, and even the partial return of public market liquidity. Taking a look at VC industry data highlights a couple of interesting trends:
1) Transaction activity has increased more than dollars deployed, confirming the anecdote that “it costs less to start a business these days.”
Silicon Valley remains the largest region for VC deployment in the U.S., followed by New England and New York. Here we focus on SV and NY given the Bay Area’s position as an industry bellwether and InSITE’s focus on the NY startup market.
Although the industry in 2009 is at approximately the same level as it was in 2004 by number of transactions, total dollars invested across the two regions is $615 million lower. On a per transaction basis, this equates to a decline in average transaction size from $8.2 million in 2004 to $8.0 million in 2009 in Silicon Valley, and an even greater decline from $7.3 million to $5.9 million in New York over the same period. This may be indicative of the media/ IT services-oriented nature of New York startups versus a more diversified (and capital-intensive) startup ecosystem out west.
# OF ANNUAL VENTURE CAPITAL TRANSACTIONS, 1996 – Q3 2010
ANNUAL $ INVESTED IN VENTURE CAPITAL TRANSACTIONS, 1996 – Q3 2010
2) The VC industry appears to be accelerating out of the downturn.
Although there are subtle variations in the timing of the recovery between regions, the post-Internet bubble recovery in VC investing broadly took hold from 2003-04. The current recovery – smoothing for a burst of investment activity in the Bay Area during Q2’10 – appears to be more robust than the one earlier in the 2000s. Although general wariness about the formation of another tech bubble may portend a more gradual growth curve in 2011 and beyond, early signs point to renewed optimism from VC partners investing out of their current funds.
TRANSACTION GROWTH FOLLOWING RECENT BUBBLES
POST-INTERNET (2003-04)
POST-HOUSING (2009-10)
INVESTMENT DOLLARS GROWTH FOLLOWING RECENT BUBBLES
POST-INTERNET (2003-04)
POST-HOUSING (2009-10)
3) The exit environment for startups has improved
Although M&A transaction activity involving venture portfolio companies was fairly steady during the Internet bubble recovery until the most recent recession, opportunities for VC-backed companies to access the public markets have been much more volatile.
It is difficult to discern whether the recent upswing in M&A activity is attributable to the maturation of the 2004+ VC investment cohorts or “option-like” acquisitions by large companies of more recent (2009-10 vintage) startups. As M&A represents the more likely exit outcome for VC investments, understanding whether this uptick represents a “steady-state” market appetite for startup acquisitions will be a critical analysis undertaken by VCs as they consider reserve requirements during this expansionary period.
VC-BACKED EXIT TRANSACTIONS, 2004 – 2010
M&A TRANSACTIONS
INITIAL PUBLIC OFFERINGS
Overall, while it is difficult to read the tea leaves for 2011, 2010 certainly marked a rebound in VC investment and may represent a new baseline off of which the VC industry can enjoy steady growth throughout the broader economic recovery.
-Ted Rosenwasser – Columbia Business School 2012
Source data: National Venture Capital Association (http://www.nvca.org)