Venture capitalists came raging back in 2010, putting $26.2 billion into 2,799 venture deals, a spike of 11 percent from 2009 and a major sign that formerly wary VCs have begun to come off the sidelines, according to a study by Dow Jones VentureSource released today.
The data also showed that 2,636 deals took in $23.6 billion, with the fourth quarter alone raising $7.6 billion through 735 deals — a 6 percent increase in capital invested from the same quarter a year prior.
The numbers backed up a much-touted report from Thomson Reuters last week that showed VCs spent the most money in 2010 since 2007.
VentureSource said that while healthcare and IT initially lead the charge, they are not currently driving growth, because investment in business technologies, consumer solutions and energy companies “gained the most traction” in 2010.
It was certainly traction that stuck.
IT companies raked in $7.2 billion for 889 deals in 2010, a jump from the $6.7 billion put into 858 deals in 2009. Software, too, did well, becoming the only IT sector to see an increase in both deal activity and capital invested, with 608 deals raising $3.8 billion.
However, VCs weren’t necessarily spending the kind of cash they did before the credit crisis, a drop that has recently been part of a major debate about how ready the venture capital community is to jump wholeheartedly back into large deal sizes generally.
The median deal size for 2010 was only $4.4 million, a drop from the $5 million median in 2009.
Still, interest in Web companies did help growth overall, said VentureSource, as “sizable cash infusions” for maturing Web companies boosted deals in other sectors.
The study said this is most likely because VCs are now pursuing strategies more akin to growth equity investing than traditional venture capital with some of their maturing Web companies.
“Companies like Groupon, Zynga and Facebook are generating hundreds of millions of dollars in revenue so VCs don’t need to exit quickly,” said Scott Austin, editor of Dow Jones VentureWire. “Instead, they are growing these companies through acquisitions of technology and talent as well as business development, which can require sizable cash infusions.”
VCs are also still waiting longer to invest, with later-stage deals accounting for 40 percent of the year’s deals and 61 percent of total capital raised in 2010. It was a minor bump up from 2009, when later-stage deals made up 38 percent of deals and 55 percent of capital raised overall.
Seed- and first-round investing remained largely unchanged, comprising 36 percent of deals and 18 percent of capital invested during 2010, a barely noticeable difference of the 35 percent of deal activity and 19 percent of capital raised year-over-year.
COMMENTARY: An increase of 11% is not that impressive when you consider that VC investments were down 40% in 2009 compared to 2008. So an increase of 11% is not a full comeback from 2008, when a total of $31 billion was invested by VC firms.
It's no secret that VC's are taking longer to make investment decisions. VC funds are not what they used to be, and VC firms are raising less capital for their portfolio investments.
What really amazes me is the attention that social media is getting, particularly Groupon, Zynga, Twitter and Facebook. I am impressed with their revenues and forecasts, but I have to question the criteria VC's are using to make their investments in companies like Facebook and Groupon.
There is simply to much hype, euphoria and speculation in the stock of Facebook and Groupon. There doesn't appear to be any effort to discount earnings to take into account the risk and uncertainty of startups whose business models are just evolving.
The current valuations are based mostly on growth in users. Sure, there is a brisk market for stocks of private companies like Facebook and Groupon, but the valuations are being determined by a closed "shadow market" of deep pocket investors like Goldman Sachs and Digital Sky Technologies. Both have poured $2 billion into Facebook. Groupon recently raised $950 million from a private placement, of which $377 million went to the company to sustain its growth. The remainder went to shareholder's to provide them with some liquidity. They recently announced that they are filing for an IPO, this after only about one year of operations.
These huge investments are driving speculation throughout the web sector, in particular location-based social network Foursquare, which has very revenues, but growing like crazy in active users. Foursquare's revenue per unique visitor is almost non-existent. Location-based check-in services are frought with a lot of controversy, particularly privacy issues, and serious adoption issues among females, which are outnumbered 8-to-2 by males.
Courtesy of an article dated January 24, 2011 appearing in VentureBeat
Comments