Later-stage Companies Emerging as Top Choice of U.S. Venture Capital Investors

Throughout most of the history of the U.S. venture capital industry, expanding, and not start-up companies, have been the primary focus of venture investors. Recent data from the PricewaterhouseCoopers and National Venture Capital Association (NVCA) annual MoneyTreeTM Report indicates that investors are beginning to focus on even later-stage companies, which could be a problem for entrepreneurs and states trying to attract earlier-stage dollars.
 
State and national investment data by stage is now available on the profile pages of the SSTI Venture Capital Dashboard for all 50 states (plus Washington, D.C., and Puerto Rico).
 
The MoneyTreeTM Report divides venture capital investments into four stages based on the maturity of the target company: start-up/seed, early, expansion and later. The expansion stage has been the leading target of investment since the survey began in 1995. While all four stages experienced increases in investment during the late-1990s, expanding companies benefited the most from this new interest in the industry. In addition to a doubling in the number of deals between 1998 and 2000, the average deal size grew from $6.8 million to $16.2 million. These numbers fell in the aftermath of the 2001 crash, but expanding companies remained the primary focus of investors for several years. (To view data on U.S. investment trends by stage, visit http://www.ssti.org/vc/us.html#stage.)
 
More recently, however, later-stage companies have been steadily growing in popularity. In 2007, investment in later-stage companies exceeded that of expansion-stage companies. If trends continue, the number of later-stage deals will exceed those of the expansion stage as well. This change represents a growing preference on the part of investors for more mature companies, which can minimize risk. This may pose a problem for companies and regions that depend on start-up/seed and early-stage investment.
 
Start-up/seed and early-stage investment have not grown as much as later- and even expansion-stage investment in recent years. Early-stage investment represents a smaller percentage of overall investment than it did five years ago, and start-up/seed investment still comprises less than 4 percent of venture funding.
 
The trend toward increased investment in later-stage companies is fairly consistent across the country. Later-stage companies have become the leading target of investment in the top 10 states for venture capital except Florida and Pennsylvania, where expansion-stage investment has continued to grow rapidly. The trend is particularly pronounced in the top two states, California and Massachusetts, where later-stage opportunities for investment abound.
 
Small sample sizes make it more difficult to decipher an investment trend in less active states, but few states have posted significant increases in start-up/seed stage funding in recent years. One explanation for this lack of start-up/seed-stage growth during a relative boom time for venture investment is that coastal venture companies are increasingly looking for later-stage investment opportunities. This affects states without their own venture capital industries more than in more active states because start-up/seed investment can require closer proximity between venture firms and start-ups to close deals and to properly develop successful companies. While venture firms may feel comfortable investing in more mature companies in faraway states, they may not feel comfortable taking a chance on a smaller firm. Thus, overall increases in venture capital investment in smaller states may not represent more opportunities for entrepreneurs.
 
The SSTI-developed pages also provide data from 1995 to 2007 on total venture capital investment and deals, as well as national share and per capita figures for each. Investment information has been derived with permission from the PricewaterhouseCoopers/NVCA MoneyTreeTM Report with data from Thomson Financial.