These are interesting times
characterized by economic and political uncertainty in the U.S and around the world
and yet in the Venture capital (VC) community, the amount of interest and
activities to create great companies remain unflappable. I think, there has
been a wide agreement among policy makers that venture capital industry is a
major contributor of the U.S. economic recovery in multiple aspects and its
importance to the U.S. economy cannot be under looked. So who are Venture Capitalist? According to Investopedia, a Venture Capitalist is an investor who
either provides capital to startup ventures or supports small companies that
wish to expand but do not have access to public funding.
People familiar with VC industry probably understands
that it’s an unique asset class with long term investment horizon (8-10 yrs) and
high risk. When an investment is made by VCs in any venture backed company (irrespective
of its stage), it is an equity investment (it can be debt sometimes but it
converts into equity) whose value is essentially zero until the company matures
over a period of time and becomes profitable, at which point the company is
either looking for IPO or expects to get acquired by other companies. According
to the National Venture Capital Association 2013 Yearbook, the number of VC
firms in existence has increased from 358 in 1992 to 1,089 by 2002 but was down
to 841 in 2012. According to them, the decrease in the VC firms from 2002 to
2012 was due to several shifts occurring in the VC industry such as consolidation
of VC firms, leaving of principals, etc. Let’s take a look at how #of deals and
amount invested has changed since 2004 in the VC industry. Per graph below, the
amount of investments (total dollars) in any given year shows that the total
investments has remained in the $20 billion to $30 billion range since 2004 (lowest
investment in 2009) with average investment per deal in the range of $6.4
million to $7.4 million.
One of the other interesting
graphs (graph #2) is the Silicon Valley Venture Capital Confidence Index
(SVVCCI). The quarterly SVVCCI Index is based on an on-going survey of San
Francisco Bay Area/Silicon Valley venture capitalists. The Index measures and
reports the opinions of professional venture capitalists in their estimation of
the high-growth venture entrepreneurial environment in the San Francisco Bay
Area over the next 6 - 18 months. The Index is interpreted on a scale of 1 to
5, 1 being the lowest and 5 being the highest. The graph shows that overall confidence
in the VC community dipped to a lowest level around financial crisis but has
increased since then due to better financial market and better risk/return
tradeoff. What’s even more encouraging is that the Index has increased for the past
4 quarters but continues to remain below pre-crisis levels as venture capitalists
remain cautious about the global economy and somewhat pessimistic about
government policies around investing.
Geographically, California
continues to dominate the VC industry in the U.S. Graph #3 breaks down the
total investments per year in different U.S. regions. 53% of the total
investments made in 2012(highest since 2004) went into California while 12% and
9% went to New England and NY Metro regions, respectively. NY Metro has seen
its share of VC investments increasing from 7% in 2004 to almost 10% in 2013
(Q1&Q2) indicating that a lot of VC firms are focusing in that region.
Last but not the least, according
to VenImpact 2011 report, although the investment in venture-backed companies
equates to approximately 0.1 percent to 0.2 percent of the U.S. GDP, VC backed companies employed approximately 11 percent of the total U.S. private sector
workforce and generated revenue of approximately 21 percent of the U.S. GDP in
2010. The recession of 2008 saw employment losses nationally, but less so with venture-backed
companies. From 2008 to 2010, as U.S. private sector employment fell 2.6
percent, venture-backed company employment fell by only 2.0 percent — 23
percent less than the overall decline. In terms of revenue compound annual
growth rate, while total U.S. sales fell 1.4 percent, venture-backed company
revenue grew at 1.5 percent and VC-backed companies outperformed their overall
industries in 12 of 16 sectors from 2008 to 2010. It’s quite evident that the VC industry drives
U.S. job creation and spurs economic growth and if U.S. wants to get out of the
financial crisis quickly, VC industry will have to play an increasingly important role
going forward. That’s why we must continue to invest in companies to continue
to drive U.S. economy toward a more prosperous and better tomorrow.