Venture Capital Wading at the Shallow End of the Pool
March 28, 2005

By George Lipper
Reprinted from National Association of Seed and Venture Funds

In the decade the PricewaterhouseCoopers/Venture Economics/National Venture Capital Association has published a tracking of venture capital investments using the popular 'Money Tree' sobriquet, we have the opportunity for a before, during and after the bubble examination of trends.

One of the most interesting is the paradoxical view that venture capital is the driving force in launching new growth businesses, driving the U.S. economy. Many headline readers (and writers, too, for that matter) have come to assume as an axiom.that venture capital equals money invested in start up companies.

As with all statistics, the story is much more complex, for the vast majority of venture capital investments, more than three-quarters of the 2004 fundings, is delivered for the expansion and later stages of already growing companies with lots of potential to grow faster. And as the years have gone by, less and less of the venture treasure is directed to those much more risky start-up opportunities. In 1995, when the venture capital pie was but $8 billion, 437 startup companies attracted $1.3 billion or 16% of the investments. In 2004, with a pool 2 1/2 times larger ($21 billion) 171 startup companies (well less than half as many as in 1995) were able to convince a VC company to get involved. to aggregated amount of about $350 million. The trend away from startups is not just dramatic, but has convinced some venture capitalists to depart the industry.

Rick Brimcomb, a Minneapolis VC observed in the Star-Tribune article two months ago, "In 1987, 22 out of 24 of the venture capitalists in the Business Journal Book of Lists did start-up, seed and first-round equity investments," Brimacomb said. "Today, there are 23 firms on that list, and not one of those companies has outside capital with an early-stage equity focus and is actively investing."

A Florida newspaper introduced its story on the Money Tree reports by defining venture capital "Venture capital is an investment in a startup business that is perceived to have excellent growth prospects but does not have access to capital markets"

The Seed and Startup stage has gradually attracted an ever-smaller potion of institutional venture capital from the 16% in 1995 to less than 2% in 2004 and the preceeding two years.

This spreadsheet is drawn from the Money Tree year end report, provided by the courtesy of PricewaterhouseCoopers/Venture Economics/National Venture Capital Association.

While no known research exists to certify the point, it suggest that the rapid growth of formal angel-investor groups and the frequent efforts of states to launch their own state-sponsored venture capital programs, owe their existence to the dearth of seed and startup capital available from the institutional venture capital community.

Here's another interesting perspective of trend lines in venture capital. The proportion of venture capital deals and dollars being used for 'initial capital' i.e., investments that are the first venture capital investment regardless of the stage of development of the firm have dropped significantly since the burst of the bubble, suggesting that venture capitals firms have been concentrating on using available 'overhang' (capital raised before the bubble with limited investment opportunity afterwards) appears to befinding its way to follow-on funding for existing portfolio companies.

Recent reports disclose an upturn in venture capital fund raising in 2004. The NVCA and Thomson Economics reported last week that 'a robust fundraising climate in the fourth quarter capped off the most active year for venture capital commitments since 2001.' 50 venture funds raised just over $6 billion in the quarter. The entire year saw 170 funds raise $17.6 billion, $3.4 billion more than the previous two years combined.

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