Equity Investment and Fundraising Reach Post-Tech Boom High, though Gaps Persist

The U.S. venture and angel markets appear to have fully recovered from their slump earlier this decade. Pricewaterhouse Coopers' Moneytree Survey reports that as of the third quarter, 2007 is on track to become the most active year for venture investment since 2001. Three years after hitting a tech bust low of just under $20 billion in 2003, venture firms investment surpassed $26 billion last year. Venture fundraising has been even stronger, as funds recovered from a low of less than $5 billion in 2001 to more than $30 billion in 2006. Meanwhile, U.S. angel investment has posted some impressive gains, jumping from an estimated $15.7 billion in 2002 to $25.6 billion last year, according to the University of New Hampshire's Venture Research Center. Angel investment, which had been a distinctly secondary market in past years, has become as active a market as venture investment.



With so much capital available for new and expanding businesses eager to pursue equity capital, why do many state and local leaders still report that capital gaps remain a serious impediment to economic growth? Despite the rapid expansion of investment overall, this new capital has not been evenly distributed. For instance, much of the recent growth in investment has gone to later-stage companies rather than seed- and early-stage firms. Venture investment at the earlier stages remains low, at less than 10 percent of total deals. This share is almost half what it was during the height of the tech boom dedicated to seed- and early-stage companies in the late 1990s.

 

Angel investors, while still the primary source for early capital, also increasingly are turning to later-stage deals to reduce the risk involved in investment. Between 2004 and 2006, the percentage of angel deals dedicated to early-stage companies fell from almost 60 percent to 46 percent. As discussed in the October 10, 2007 issue of the Digest, post-start-up stage deals now represent the majority of angel deals. For entrepreneurs attempting to find equity capital that will help them to survive the early "valley of death" period of firm development, the emphasis on later-stage investment poses a difficult obstacle.



Also, some industries have experienced more growth than others. Software and biotechnology remain the leading sectors for venture investment, though the overall percentage of venture investment flowing into these industries has declined as investment becomes more diverse, at least among the top tier of industry sectors. Together, software and biotechnology still represent about half of all venture investment, but several other sectors have been growing quickly over the past few years.

 

Medical device companies have been on an upward trend for investment since 2003, while the past two years have brought quarter-after-quarter of record investment levels for the Industrial/Energy sector. The Industrial/Energy sector includes clean and renewable energy and environmental technology companies. Though the Media sector has struggled in the past few years, 2006 saw it rebound to 2001 levels. Service-oriented sectors, such as IT and Health Care Services, have experienced a gradual decline in their share of investment.



Finally, regional disparities in capital availability persist even during this period of growth, and have even grown somewhat in intensity. Since 2001, California and Silicon Valley have steadily increased their lead in U.S. venture investment. Last year, Silicon Valley firms received about 36 percent of the country's venture capital, and while the region may have receive more total dollars during the tech boom, its share of national investment has never been higher. The same is true for the entire state of California, where most of this recent growth has come from regions outside of Silicon Valley. Between 2003 and 2006, few other states significantly increased their share of national venture investment; the exceptions include New York and Washington, both with 1.6 percent growth.



These persistent gaps may leave early-stage/Midwest/consumer service companies frustrated with the frequent reports that the venture capital industry has been saturated with cash. For state capital access programs, these trends beg the questions of how to properly target their investments so that they provide assistance to underserved companies and do not simply contribute to the growing tide of investment.

 

An overview of these trends is available in PowerPoint format as presented at this year's SSTI Annual Conference. Download the presentation at: http://www.ssti.org/capitaltrends07.ppt