According to an NVCA and Thomson Reuters report issued this morning, U.S. venture capital firms raised $4.1 billion from 35 funds in the first quarter of 2013, an increase of 22 percent. But compared to Q4 2012, there is a 14 percent decrease by number of funds.
Number of Funds Raising New Venture Capital Investments - Years 2009 through Q1 2013 - Thomson Reuters and NVCA - Apr 2013 (Click Image To Enlarge)
The actual number of funds raised during the first quarter of 2013 is a 34 percent decline from the number of funds raised last year and marks the slowest quarter for venture capital fundraising, by number of funds, since the third quarter of 2003. The top five venture capital funds (three from Massachusetts) accounted for 57 percent of total fundraising during the first quarter of 2013.
Venture Capital Fundraising - 2005 through 2012 and Q1 2013 - NVCA - Apr 2013 (Click Image To Enlarge)
John Taylor, head of research for NVCA said in a press release.
“The first quarter venture fundraising activity represents more than just a 'slow start' to the year and really demonstrates the contracting and consolidating nature of our asset class.”
He says.
“The lack of a strong exit market is keeping many funds that would like to be raising money away from investors until they can demonstrate a track record. This dynamic is keeping the number of funds raised low. Many of the larger funds closed last year and won’t be back in the market until 2014 and beyond, keeping total dollar levels lower this year.”
There were 30 follow-on funds and five new funds raised during the first quarter of 2013, a 6-to-1 ratio of follow-on to new funds. The number of new funds raised during the first quarter marks the lowest level of first-time funds raised during a quarter since the fourth quarter of 2006 (A “new” fund is defined as the first fund at a newly established firm, although the general partners of that firm may have previous experience as a VC).
No of New and Follow-On Venture Capital Funds - Years 2009 through Q1 2013 - Thomson Reuters and NVCA - Apr 2013 (Click Image To Enlarge)
By dollars raised, follow-on funds account for 98 percent of total dollar commitments during the first quarter of 2013. By comparison, over the past five years, follow-on fund dollars have accounted for 92 percent of total venture capital fundraising.
The largest first fund to have raised during Q1 was Washington, D.C.-based NaviMed Partners, L.P. which raised $44.8 million. Other large raises in the quarter included Battery Ventures X, which raised $650 million, Third Rock Ventures III, which raised $516 million and Spark Capital IV, which raised $450 million.
The NVCA is predicting lower fundraising levels this year, so it should be interesting to see if this actually is reflective in the numbers. There were a number of large raises last year, so perhaps we’ll see a bigger 2014 for VC fundraising.
COMMENTARY: According to the National Venture Capital Association (NVCA), in 2010 there were 462 active U.S. venture capital firms that invested at least $5 million. It is surprising to see how much that number decreased from then, 1,022 firms operating during the tech bubble of 1998.
The JOBS Act
With the passing of the JOBS Act, which was signed into law by Obama in April 2012, a new era in capital formation is currently unfolding. Tittle III of the JOBS Act introduced the possibility for non-accredited investors to participate in private offerings, without the need of making $200,000 in salary on a yearly basis or having $1 million in assets. It is the first real change that the Securities Act of 1933 will experience since its establishment in the aftermath of the stock market crash of 1929.
Once the regulations from the JOBS Act are issued, equity crowdfunding will be available for non-accredited investors. Until then, most platforms are operating via Regulation D rule 506 for accredited investors. This only targets 1% of the U.S. population, which may sound small, but is still a $20 billion market. The disruptive power that equity crowdfunding brings is imminent, and at RockThePost, we think it will overcome mainstream overnight.
There are many reasons why this new way of investing will be a success. On one hand, people love to support others and know that they are part of something that will eventually contribute to the U.S. economy and job creation. On the other hand people are greedy and like to receive a nice return on their investment. The industry has all the ingredients to become a new medium that will be widely accepted and utilized.
It makes total sense for the 500,000 businesses that launch every month in the U.S. to raise funds on an online investment platform. Currently the average to raise funds offline at an early stage takes 8 months more or less, and is a full time job. Without a doubt it would be much more comfortable for ventures to put up their offering online and get funded in 60 or 90 days. Otherwise they will have to fight to make it into the 3,700 companies that get financed by VC firms out of the 6 million businesses that launch every year in the U.S.
Equity-Based Crowdfunding
Moreover, according to the Crowdfund IQ report, over 58% of the U.S. population has a high interest in potentially making an investment via equity crowdfunding platforms in startups. Findings from a Kauffman study and Wall Street Journal entry estimate the combined friends & family startup investments made in the U.S. plus the dollar amount angel investors invest, puts the industry at an approximate market of $120 billion.
Before the JOBS Act kicks in, angel investors (around 750,000 people in the US) are already revolutionizing the startup investment process. Brian Cohen, Chairman of the NY Angels, recently cited an article that showcased how angel investors made 50,000 investments last year in early stage deals, while Venture Capital firms made 600. The average angel investment is $10,000 in deals that range from $25,000 to $2 million.
Once the JOBS Act regulations are in place, non-accredited investors will be able to participate in private offerings. The type of investor profiles that we expect by then will be individuals earning over $75,000 in annual income, are on average 41 years old and hold at least a 4 year degree. In comparison to the size of investments made by angel investors, non-accredited investors will invest 2 to 3 times per year averaging $2,000.
Having this in mind, we at RockThePost are committed to democratize the process of fundraising by bringing the offline world online and streamlining it. There will be no need to send email attachments, go door-to-door, or waste time on the phone. Everything is posted online, and for the most part is visual rather than plain boring text.
As online fundraising becomes more utilized, Venture Capital Firms with funds under $200 million will potentially go out of business or invest online.Lawrence Lenihan, a respected venture capitalist and NYU Stern professor stated firms that have $200 million or over are the ones who typically get involved with startups raising their Series A round of funding (between $3 and $5 million). Having said that, if Title III of the JOBS Act sets a limit of $1 million that a startup can raise online on a yearly basis from equity or debt crowdfunding services, funds that are oriented to seed type deals will have worthy competition (much needed in my opinion).
TechCrunch published an article saying there is going to be a 60% increase in the amount invested in startups by 2020 from friends and family capital. At the same time, it forecasts that by 2020 VCs will only represent a quarter of the capital invested, which will show a decrease of 41% compared to the numbers posted in 2011.
Courtesy of an article dated April 8, 2013 appearing in TechCrunch and an article dated March 20, 2013 appearing in Forbes
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