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Venture Investment Declines, While Angel Activity Ticks Upward

May 01, 2013

Both venture capital dollars invested and total deals declined in the first quarter of the year, according to the PricewaterhouseCoopers/National Venture Capital Association (NVCA) Moneytree survey. The capital-intensive life science and clean technology sectors were particularly hard hit, along with seed and early stage investments. Within the data, however, a number of bright spots remained for entrepreneurs seeking capital. Seed and early stage investments continue to comprise more than 50 percent of all deals and first-time fundings remain within a healthy range. New reports from the University of New Hampshire's Center for Venture Research (CVR) and the annual Halo Report also suggest that the angel investment market continues to grow at a modest rate.

Venture Capital
In the first quarter of 2013, venture capitalists invested $5.9 billion, a 12 percent decrease, in 863 deals, down 15 percent, according to the Moneytree survey. Venture capital (VC) dollars invested have not been at this low a level since 2010, when the market was still in the early stages of recovery from the 2008 financial crisis. VC dollars now have declined for three consecutive quarters, creating some concern that VC may not soon recover to its pre-crisis levels.

VC deals also fell to their lowest level since early 2010, but there has been no consistent decline in deals as with VC dollars. Just last quarter, the number of venture deals was at one of its highest points since 2008. The relative strength of venture deals over the past few quarters, as compared to VC dollars, is explained by NVCA as a shift in investment activity from capital-intensive industries, such as life sciences and clean technology, to more capital efficient industries, such as information technology. In a post by NVCA's John Taylor, Taylor suggests that both life sciences and clean technology are in the midst of challenging policy debates, which have stifled exits in those industries and reduced that number of first-time investments.

Meanwhile, venture activity increased in in the software industry, and, to a lesser degree, media and entertainment. Software companies receive 40 percent of all VC dollars in the first quarter of this year, with an increase of 8 percent over the previous quarter. Software deals fell 18 percent after reaching their highest level since 2001 last quarter, but still remain at a historically high level. The 37 percent increase in VC dollars for media and entertainment was driven by a single large deal.

Though VC dollars invested in seed stage companies rose 11 percent last quarter, deals for seed, early and first-time companies were down, as were dollars for first-time financings. Much of the decline in all of these categories was due to the weakness in life science investment, which reached its lowest level of first-time financing since 1995. Software, however, continued to be strong in dollars and deals for newer companies and first-time capital recipients.

The survey suggests that despite the dwindling overall numbers, and the distressing declines in a few capital-intensive industries, opportunities for investment continue to exist in more capital efficient industries. Also, seed and early stage deals continue to comprise more than 50 percent of all deals, a historically high level.

NVCA plans to release data on 2012 venture capital returns in the next few weeks.

Read the 2013 Q1 Moneytree report at: http://www.pwc.com/us/en/press-releases/2013/venture-capital-investments-decline-in-dollars.jhtml.

Angel Capital
Angel investment continued its trend of moderate growth last year, with total angel investment dollars rising 1.8 percent to $22.9 billion, according to the CVR report. Recipients of angel investment grew 1.2 percent to 67,030, while the number of active investors fell 15.8 percent to 268,160. Because both dollars and deals increased, average deal size remained nearly unchanged, but the decrease in investors suggests that some angels are leaving the market, while the remaining investors escalate their number of deals.

While seed, startup and early stage companies still comprise the bulk of angel capital investments, deals in both categories fell in 2012. In 2011, seed, startup and early stage companies participated in 82 percent of all angel deals, In 2012, that number fell to 68 percent. Meanwhile, expansion stage deals almost doubled their share of total deals. As with venture capital, software remains the leading industry for investment with about 23 percent of deals.

Download the Center for Venture Research report on 2012 angel investment at: http://paulcollege.unh.edu/sites/default/files/2012_analysis_report.pdf

The 2012 Halo Report, produced by Silicon Valley Bank, CB Insights and the Angel Resource Institute, reveals that U.S.angel investment activity remains more geographically diverse than the venture capital market. Sixty-nine percent of angel deals are done outside of California and New England, according to the report. Last year, the U.S. northwest and southwest, increased their overall share of angel deals. Northwestern states received 6.3 percent of all deals, while southwestern states received 11 percent. California's share of national angel deals fell from 31 percent in 2011 to 23 percent in 2012.

For more data from the 2012 Halo Report, visit: http://www.svb.com/halo-report/.

capital, venture capital, angel capital