Lucky 13: Top venture capital trends in 2013

Superstitious types would have one believe that 13 is the unluckiest number. But for the venture capitalists, 2013 turned out to be a pretty good year.

There was plenty of favorable fortune to go around for an industry that’s suffered many disappointments in recent years. The IPO market was back on track. Life science investors saw a sharp uptick in big exits. And cash distributions to limited partners – considered by many the clearest measure of venture returns – were among the highest in a decade.

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Year in Review

The year brought plenty of disruption, as well, which is something VCs tend to welcome more in the investments they target than in their own industry. A few high-profile departures and new hires spotlighted how the industry’s established leaders are giving way to a new set of up-and-comers. On the fundraising side, meanwhile, the Securities and Exchange Commission’s approval of lifting of the ban on general solicitations means venture firms and portfolio companies may now publicly discuss plans for raising capital.

In many cases, industry trends took even VCs by surprise. Few predicted the sharp rise of bitcoin, though venture investors were quick to recognize the recognize opportunities tied to the alternative currency. Hardware investments, long out of favor in venture circles, also gained broader appeal, juiced by 3D printer-maker MakerBot’s high-return exit.

We took a look at 13 of the top trends and developments impacting the venture business in 2013. Agree or disagree? Either way, we welcome your feedback.

And here’s hoping good fortune will carry forward into 2014.

1. IPOs are back

The IPO window remained wide open in 2013, enabling a number of high-profile venture-backed companies to make a long-awaited exit. Leading the pack was Twitter, which raised nearly $2 billion in a November debut that marked the biggest social media offering since Facebook. The stock has performed well post-IPO, too, with shares up about 20% in mid-December from their initial closing price.

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Twitter IPO

Source: REUTERS/Hyungwon Kang

A tweet from Twitter Inc. announcing its initial public offering is shown in this photo illustration.

Twitter was certainly not the only successful offering. Standout performers include FireEye, a security software provider, and Tableau Software, a developer of data visualization tools.

Which firms scored the most exits? An analysis of data from Thomson Reuters (publisher of VCJ) shows that as of mid-November, 187 venture firms and corporate venture arms have had at least one IPO liquidity event in 2013. A total of 31 have had three or more. At the top of this year’s list is Kleiner Perkins Caufield & Byers, which had at least seven IPOs to its credit, including Twitter, Epizyme, Chegg and Veracyte. Next up are Meritech Capital Partners, MPM Capital and New Enterprise Associates, each with six.

2. Ban on general solicitation lifted

Raising money for a new venture capital fund has long been a quiet business. Many VCs like it that way, preferring to shine the spotlight on portfolio companies. But regardless, it was also a matter of law, enshrined for nearly 80 years in a Great Depression-era regulation banning public solicitation of investments for most private securities.

Those rules no longer apply. In the summer, the Securities and Exchange Commission gave the green light to provisions of the 2012 Jumpstart Our Business Startups (JOBS) Act that allows firms to publicly talk about fundraising, even for vehicles that are open only to accredited investors. In September, the new rules took effect.

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U.S. Securities and Exchange Commission

Source: REUTERS/Jonathan Ernst

A general exterior view of the U.S. Securities and Exchange Commission (SEC) building in Washington, J

So far, there’s been no great rush of venture fundraising announcements. One exception was ff Venture Capital, which announced on its blog in October that partners are in the market for a new fund. In the post, Founding Partner John Frankel said the firm made the move because “someone has to be willing to be the first firm to step forward and be willing to share performance data, publicly announce that they are open to new investors (albeit only accredited investors) and share their story.”

Forecasts are that more will follow. SEC Corporation Finance Director Keith Higgins said in October that 200 private securities deals are expected to take advantage of new rules that allow hedge funds and other firms to reach investors through Internet and television advertising. Higgins said that, collectively, the offerings that will advertised with the aim of raising more than $1 billion in capital. It’s unclear, however, what proportion of those offerings will come from VCs.

3. Crowdfunding era comes closer

The lifting of the ban on advertising to attract private market investors has also changed the playing field for startups. Under the new rules, private companies can now ask for dollars from accredited investors through tweets, Facebook posts and website ads. Previously, such private companies largely would have been limited to investments from friends, family and venture firms.

Scores of websites have sprung up to connect budding financiers with struggling entrepreneurs who are eager to tap new sources of cash and close funding rounds far more speedily than under the traditional venture model. AngelList, for instance, took the wraps off a new type of investment vehicle, a syndicate, where one angel investor leads a group of accredited investors. CircleUp, a funding site for consumer products startups, opened up some of its listing for non-accredited investors to peruse, even if they can’t invest.

That may change soon too. Eventually, more investors will be allowed to make small investments in private companies under the crowdfunding provision of the JOBS Act. Those new rules could take effect as early as 2014.

4. Life science exits revive

For years, public market demand for life science offerings was too sluggish for VCs to count on IPOs to provide the desired returns. Most exits, large and small, were carried out through acquisition.

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Pills of All Kinds

Source: REUTERS/Jacky Naegelen

Pills of all kinds, shapes and colors. Similarly, life science entrepreneurs have various sources of investments to choose from, too, as venture funding dries up.

In 2013, the climate improved dramatically. A total of 31 venture-backed life science companies went public in the first three quarters of the year, according to the National Venture Capital Association and Thomson Reuters. Of those, 16 had their debut in the third quarter, raising $1.35 billion and making it the busiest quarter for biotech offerings since 2000.

Interest in new life science offerings follows in part from the strong performance of large-cap and mid-cap biotech stocks, which soared in 2013. The trend provided a boost to venture returns, with a number of VCs seeing multiple life science portfolio companies go public and sustain valuations above $500 million. The list includes Kleiner Perkins Caufield & Byers, Flagship Ventures, Clarus Ventures, Third Rock Ventures and Polaris Venture Partners.

Several newly public companies also maintained valuations near or above $1 billion, including Epizyme, a developer of therapies for genetically defined cancers, TESARO, an oncology-focused drug developer, and Foundation Medicine, a developer of diagnostics based on genomic analysis of cancer cells.

5. Corporate venture ascends

Corporate venture investing is approaching levels not seen since the dot-com boom, and it’s showing no signs of slowing down.

In 2013, corporate VCs were on pace for their biggest year in more than a decade, with corporations and corporate venture arms investing $2.36 billion through the first three quarters of the year. Corporates contributed to some of the year’s largest venture rounds, as well, taking part in the financings of car service Uber, enterprise storage provider Pure Storage, file-sharing provider Box and smart thermostat maker Nest Labs.

More players are also entering the space. Global Corporate Venturing now tracks 1,133 active corporates, with 227 new organizations opening their doors since the start of 2010, including Dell Ventures, Bloomberg Beta, 7-Ventures and Nielsen-backed Pereg Ventures. Corporate VCs are also rolling out larger dedicated funds. In October, SAP Ventures said it has raised a second fund almost double the size of its first, while Dell Ventures in December announced that its newest fund would be about four time size of its predecessor.

The explanation for the new interest isn’t too mysterious. Technology cycles are compressing and internal R&D efforts can’t keep up. So large corporations are increasingly turning to their venture arms to find and get exposure to the most compelling and disruptive new technologies and business models in their respective sectors.

6. Series A crunch continues

It was hard to go to a venture capital event in 2013 without hearing some mention of the much-disputed Series A Crunch. Broadly, entrepreneurs’ and seed investors’ concern is that the low cost of starting an Internet or software company has resulted in a flood of new startups. And the majority likely won’t live to see a Series A funding round.

Many VCs believe this is a good thing for the venture industry. VCs have a broader choice of companies to back, and they can cherry-pick the best. For another, given the low cost of getting to product launch, companies that do secure an initial venture round are generally further ahead in their business than in past cycles.

But expectations of a tough Series A fundraising climate also appears to have contributed to another trend: larger seed rounds. In the first three quarters of 2013, Pitchbook found that the median pre-money valuation for all companies at the seed stage has nearly doubled over the last three years, from $3.2 million in to $5.2 million. The larger seed rounds help companies in that they have more time to develop their businesses before pounding the pavement for fresh capital. On the downside, higher seed valuations may turn off inflation-sensitive VCs.

7. Valuations soar

The current generation of high-achieving venture-backed startups is setting new records in two categories. First, they’re acquiring users at an unprecedented clip. Second, they’re seeing valuations rise faster and higher than ever before.

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Brian Chesky

Source: REUTERS/Stephen Lam

Brian Chesky, co-founder and CEO of Airbnb, speaks during the Reuters Global Technology Summit in San Francisco. The company boasts one of the and fastest-growing reported valuations.

There’s a long list of venture-backed companies with valuations above a billion dollars — more than two dozen at last count. Notably, many of the most valuable names in the consumer Internet and mobile space, including Airbnb, Uber, Box, and Pinterest, have only been around a few years. The year’s breakout star, self-deleting messaging provider Snapchat, was barely over two years old in November, when it reportedly rejected a $3 billion acquisition offer from Facebook.

That kind of supercharged growth is changing the risk-reward dynamic for VCs, doling out enormous return multiples for savvy (and lucky) early investors and forcing later-stage investors to buy in at the kinds of valuations formerly reserved for portfolio company exits.

Yet fast growers have proven some capability of delivering enviable exits. That point was driven home in May, when Yahoo bought the blogging service Tumblr for $1.1 billion in cash.

8. Bitcoin goes viral

The surging popularity of bitcoin has brand-name venture capitalists and brand-new firms alike investing real money in the controversial virtual currency.

This year saw the launch of several dedicated bitcoin venture funds. Liberty City Ventures of New York said it set up a $15 million fund to back bitcoin and other digital currency companies, while Adam Draper, the son of Draper Fisher Jurvetson co-founder Tim Draper, said his Boost VC accelerator had created the Boost Bitcoin Fund in partnership with the Bitcoin Opportunity Fund and entrepreneur Ben Davenport.

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Bitcoin enthusiast Mike Caldwell’s coins

Source: REUTERS/Jim Urquhart

Some of Bitcoin enthusiast Mike Caldwell’s coins in this photo illustration. Bitcoins, touted by some experts as the future of money, gained in prominence during Europe’s financial crisis as more people questioned the safety of holding their cash in the bank. Cameron and Tyler Winklevoss said that they could see the digital currency becoming a country’s official money.

Another serial entrepreneur, SecondMarket CEO Barry Silbert, also rolled out a fund, the Bitcoin Investment Trust, established to offer investors exposure to bitcoin. Silbert faces competition from Cameron and Tyler Winklevoss, the twin brothers famous for their legal battle with Mark Zuckerberg, who announced earlier this year they would launch a publicly traded exchange called Winklevoss Bitcoin Trust.

As for bitcoin-focused startups, although controversy continues to swirl around the digital currency, at least 15 bitcoin companies have raised more than $60 million, according to Thomson Reuters research. One of the largest capitalized is San Francisco-based bitcoin startup Coinbase, which has raised more than $31 million from Andreessen Horowitz, Union Square Ventures,  Ribbit Capital and others.

9. Fundraising in a funk

Venture capitalists are known for being an optimistic bunch. Their limited partners, less so. Certainly, venture LPs were showing limited enthusiasm for the asset class in 2013, as fundraising totals remained down from the prior year and far below their historical peak.

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U.S. currency

Source: REUTERS/Sam Mircovich

Various denominations of U.S. currency.

In the first three quarters of the years, 144 funds raised $11.6 billion, according to the NVCA and Thomson Reuters. That represented a drop of 29% from the same period a year ago. Preliminary data suggests full year fundraising will also be well below 2012 levels, with little indication of an acceleration in fund closings.

While top-tier firms had little trouble closing funds, emerging managers and non top-quartile performers struggled. Several limited partners told VCJ that they agree to fund fewer than 5% of the emerging managers who present to them. For some, the rate is closer to 2%. A handful of large funds accounted for the majority of money raised. In each quarter, the top five venture capital funds accounted for more than half of all capital raised that quarter. The largest fund of the year was Greylock XIV, at $1 billion, which closed in the third quarter.

10. Draper, Heesen depart after long tenures

It isn’t over till the tall man sings. If that tall man is Tim Draper, the third-generation venture capitalist known for his frequent public renditions of his VC-inspired anthem “Riskmaster,” then it really may be the end of an era.

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Mark Heesen

Source: Photo courtesy of NVCA

Mark Heesen

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Tim Draper, DFJ

Source: Photo courtesy of Draper Fisher Jurvetson

Tim Draper

Draper confirmed in November that he is stepping back from his investment role at Draper Fisher Jurvetson, the firm he founded in 1985, and will not be an investment partner in the firm’s next fund. However, he will remain a managing director of existing funds for DFJ, known for investments such as Skype, Tesla Motors, and, more recently, cloud-storage provider Box.

Yet Draper isn’t getting out of the startup business. With the time he’s not spending at DFJ, Draper says he plans to devote himself to building Draper University, a Silicon Valley-based institute for entrepreneurs, and experimenting with new models for venture capital.

Earlier in the year, another venture industry stalwart, NVCA President Mark Heesen, disclosed his plans to step down. Heesen, served as NVCA president for 14 years, announced in March that he would retire from his role later in the year. Heesen joined the NVCA 22 years ago, first serving as head of public policy before becoming president.

During that tenure, Heesen said, he logged more than 1 million frequent flier miles – one reason he is now looking forward to spending more time at home.

11. Hardware and wearables heat up

Software may be eating the world, as Marc Andreessen is fond of saying. But when it comes to allocating venture capital dollars, it appears an increasing proportion has been going to hardware.

From drones to 3D printing to Google Glass to robot technology, hardware investing isn’t what it used to be. Investor interest in connected hardware, in particular wearables, has taken off this year. And after a protracted dry spell, hardware companies can raise money again. Fueling the new interest is a confluence of technological transformations, including mobile computing, crowdfunding and lower component pricing. And while deals haven’t yet reached a social-media-like frenzy, there have been a number of large rounds – and a couple good exits to boot.

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Source: Photo by Oscar Urizar, Red Eye Collection

Baxter, a two-armed industrial robot made by Rethink Robotics in Boston, is an adaptive manufacturing robot containing cameras, sensors and sophisticated software that enable it to “see” objects, “feel” forces and “understand” tasks. The company has raised $62 million in venture funding to date.

Besides Kickstarter and Indiegogo, where a lot of hardware fundraising is taking place, some of the most recent venture funding rounds include $40 million for Lytro, a maker of a consumer light field camera, $11 million for LittleBits, a maker of electronic modules for do-it-yourself gadget assembly, and $7 million for CyPhy Works, a developer of drone devices.

As for exits, 3D printer developer Stratasys proved that VCs can achieve high-multiple returns from hardware investments when it purchased MakerBot for about $600 million this past summer. MakerBot, which makes 3D printers for the consumer market, previously raised about $10 million in venture funding. Meanwhile, Google has proven to be an active acquirer, scooping up robot technologies, including the Boston Dynamics late in the year. Could DFJ-backed Rethink Robotics, maker of the Baxter, achieve an exit in 2014?

12. The full-service VC

To attract the most talented and ambitious entrepreneurs, it used to be enough for VCs just to keep an open checkbook. No more. These days, the most competitive startups are demanding much more added value from their venture investors. This can come in the form of recruiting assistance, networking opportunities and even help balancing the books or redesigning the homepage.

In 2013, the notion of the “full-service VC” truly took hold, as firms rivaled to outdo one another for title of most entrepreneur-friendly. At Andreessen Horowitz, a staff of at least 50 was on hand to assist in five areas of portfolio services. Google Ventures, meanwhile, retained a staff of more than 40, along with a Startup Lab to link portfolio companies with from its corporate parent. Firms that have been around for decades also upped their full-service game, including Bessemer Partners, which brought on an in-house CFO to work with portfolio company finance chiefs. Kleiner Perkins named General Partner Bing Gordon chief product officer, leading its ProductWorks program to support entrepreneurs.

13. Meet Bobby Franklin

After vetting more than 100 applicants over the summer, the group charged with finding a new president and CEO for the NVCA made its choice: Bobby Franklin.

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Bobby Franklin, NVCA

Source: Photo courtesy of the NVCA

Bobby Franklin, NVCA

Franklin, a longtime lobbyist, comes to the NVCA from CTIA – The Wireless Association, where he has served as executive vice president. He succeeds Mark Heesen who will become president emeritus.

The incoming president brings several skills that will help him, including a long record of service in Washington, D.C. Previously, he led the Washington office of Alltel Communications. Franklin, a native of Arkansas, began his career working for Arkansas Senator David Pryor.

Franklin joined the NVCA in September, and spent much of the rest of the year dividing time between D.C., Silicon Valley and other national venture hubs in an effort to get up to speed on pressing issues facing the industry whose lobbying efforts he will now lead. No doubt, the travel will continue to pick up in 2014.