Investors Gravitate to IT, Shy From Life Science, Clean Tech in 2012

In the first half of 2012, venture capitalists invested $13.1 billion in 1,707 deals, according to data from the quarterly survey conducted by PricewaterhouseCoopers (PWC) and the National Venture Capital Association (NVCA). This represents a marked decline from the first half of last year, when investors completed 1,942 deals with $14.7 billion. Though activity picked up in the second quarter (Q2) in 2012, both deals and dollars remained lower than the same quarter last year. The slowdown may be a reflection of some larger structural changes, as the entire industry contracts and venture capital (VC) dollars become concentrated in the hands of fewer firms. Since many of the remaining large firms are focused on information technology (IT) companies, IT deals have increased while investments in other sectors has declined.

The PWC/NVCA release notes that, despite the decline from 2011, the industry experienced a double-digit increase in both dollars and deals in Q2 compared to Q1. Deals grew by 11 percent and total dollars increased by 17 percent. The first half of 2012, however, has seen much lower activity than the first half of 2011, when it appeared that the venture industry was on track to return to its level before the mid-2008 crash. The recovery appears to have peaked in Q2 of 2011, followed by three quarters of declining activity. Despite the bump in the last quarter, venture activity is on track fall short of last year's levels.

An April PWC/NVCA report attributed the early 2012 slowdown to caution on the part of investors. Low returns in public markets during late 2011 had made firms hesitant to complete deals. In the current report, the authors link the longer-term slowdown to the declining number of firms, and the concentration of funds in the hands of top tier VCs.

A recent TechCrunch post by Redpoint Venture's Tom Tunguz provides some details on this trend. Historically, the top 25 firms have raised about 30 percent of venture dollars, according to Tunguz, referencing a Wall Street Journal article based on Dow Jones VentureSource data. In the first half of 2012, the top ten firms raised 69 percent of all dollars. As the industry becomes more concentrated, the health of the U.S. venture investing has become more centered on the fundraising and investment habits of top tier firms.

One bright spot in the news is the strong performance of investing in the software and Internet sectors, which have benefited from VC industry consolidation. Both sectors received their highest level of investment in a decade. Software and Internet companies tend to be capital-efficient, with clearer paths to liquidity. Also, since the list of top tier venture firms is dominated by Silicon Valley-based companies with strong links to the IT community, the evolution of the industry favors IT-related companies.

Read the PWC Moneytree report at: http://www.pwc.com/us/en/press-releases/2012/2012-q2-moneytree.jhtml.