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Venture Capital Forecast: Good News for Software Firms, Not So Much for Others

What’s the state of venture capital these days? Continuing a trend that’s been going on for a while now, both the number of VC dollars and the number of VC deals are shrinking, according to the Q1 2013 MoneyTree™ Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA). VC investment for the quarter declined 12 percent in terms of dollars and 15 percent in the number of deals compared to Q4 2012.

What’s behind the decline? Venture capitalists are looking for industries where they can quickly become liquid, whether via IPO, merger or acquisition. This is becoming more difficult, so VCs are raising less money and investing in fewer firms.

One exception is the software industry, which accounted for 40 percent of all VC dollars invested last quarter. The report describes software firms as “capital-efficient” companies that need less money and achieve liquidity more rapidly, making them highly desirable to VCs. In contrast, life sciences (biotechnology and medical devices) and clean technology companies, which are capital-intensive industries with a long horizon to liquidity, saw their VC dollars and number of deals dwindle. Overall, investments in life sciences declined 28 percent in dollars and 23 percent in deals; this industry saw the fewest number of deals since the first quarter of 2009. Clean tech declined by 35 percent in dollars and 13 percent in deals; its investment total was the lowest since the first quarter of 2006.

Overall, $2.3 billion in VC funds were invested in software companies in Q1 2013, up 8 percent from the previous quarter and marking the fourth quarter in a row that more than $2 billion was invested in this industry. While the media/entertainment sector saw a 37 percent increase, this was mostly due to one very large deal.

Eleven of the 17 sectors in the MoneyTree study saw decreases in dollars invested in the first quarter, including industrial/energy (63 percent decrease), IT services (41 percent decrease) and semiconductors (39 percent decrease)

What stages of companies are most likely to receive VC financing today? Seed or early stage deals accounted for 52 percent of total deal volume in Q1. Expansion stage deals accounted for 25 percent of total deal volume, and later stage deals accounted for 23 percent.

First-time financing dollars (that is, money invested in companies receiving their first VC infusion) decreased 20 percent to $903 million; the number of companies fell 21 percent, to 263. Most of the companies (63 percent) receiving first-time financing were software firms.

Image by Flickr user greggoconnell (Creative Commons)


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