Michael Greeley: Ring Out the Old Year

On the heels of the fundraising data for 2011, PricewaterhouseCoopers and the NVCA released the 4Q 2011 and full year VC investment data. It was yet another year when VC’s invested ($28.4 billion in 3,673 companies) meaningfully more than we raised ($18.2 billion by 169 funds) – and as I have said in the past, this just cannot end well. Observers of the VC industry keep referring to the industry as “burning off the overhang.” As a point of comparison, Dow Jones reported that VC’s invested $32.6 billion in 2011. Why do these sources report such widely divergent data – all the time?

Out of the blizzard of data I looked at this weekend, I thought I might pull out some interesting insights and trends which might be emerging. Feel free to challenge some of my conclusions.

• 4Q11 saw $6.6 billion invested in 844 which is up from $5.5 billion (861 companies) in 4Q10 although was down significantly from the $7.3 billion in 3Q11, which is odd given 4Q is usually greater given year end considerations and that 3Q includes July and August. Are we starting to see a tapering off?

• Seed investing in 4Q11 was a shocking 2% of overall activity (only $134 million in 80 companies – my bet is it is under-reported frankly) and well below the prior two quarters of 2011: 2Q11 was $412 million in 124 companies; 3Q11 was $223 million in 111 companies. Are the angels re-trenching? I have argued in the past that we may be seeing the “End of the Great Seed Experiment.”

• Interestingly seed and early stage investments in 4Q11 totaled $2.5 billion (or 36.5% of total dollars) in 444 companies (or 52.6% of all companies), confirming the rotation to seed and early stage investing and that those companies do not need that much capital.

• 238 software companies raised $1.8 billion ($7.4 million per company) in 4Q11 which was the single largest category. Second largest was biotech – $1.3 billion in 111 companies ($11.5 million per). Software captured 27% of all 4Q dollars invested, biotech was 19% of total. The smallest category? Business products attracted $24 million or 0.4% of total!

• There were 844 investments in 4Q11, the lowest level in any quarter last year. That has not happened in recent memory.

• $920 million dollars was invested in 4Q11 in first time companies which is 14% of all dollars invested. This compares unfavorably to 4Q10 of 16% and 3Q11 of 17.7%. Arguably being the first dollar invested in a company is the most risky round. Are VC’s cycling towards companies which have already raised capital?

• According to PwC only two states did not have one company last year which raised VC: Arkansas and Nebraska. Four states had only one company all year: Hawaii, Idaho, North and South Dakota.

• The largest “venture” deal in 4Q11 was the $250 million invested in Dropbox. The top ten largest deals attracted $1.2 billion in aggregate (or 18.6% of all dollars invested) for an average of $120 million per investment. Doesn’t really feel like venture capital to me.

• Lastly, the insufferable New York vs. Boston debate. In 4Q11 New England reported 107 deals versus 82 deals in New York, and 441 versus 379, respectively, for the entire year. New England captured $777 million dollars compared to $545 million in New York. Nearly 13% of all investments were in New England, almost 10% in New York metro area – which both look puny compared to the 273 investments in Silicon Valley (32% of total or $3 billion). Is Boston back? I don’t think it ever went away.

Interesting data. Mirroring the consolidation of venture funds, I think we are starting to see fewer entrepreneurs raising capital and there may be fewer “first timers” allowed in – particularly as the seed activity tapers off. Just a few thoughts.

Michael Greeley is a general partner with Flybridge Capital Partners. He blogs here and tweets here. The opinions expressed here are entirely his own.