Fourth Quarter Increases Cannot Salvage Slow Year for Venture Capital Exits and Fundraising

U.S. venture capital fundraising and venture-backed exits improved marginally in the fourth quarter of 2009, despite having a very slow year overall, according to the National Venture Capital Association (NVCA). Venture fundraising increased to $3.8 billion in the last quarter, an 82.6 percent increase over the previous quarter but still far short of fundraising levels in recent years. While investors expect activity to grow in 2010, most predict that the industry will remain smaller than its scale in the 1990s and 2000s, with fewer firms and increasing focus on late-stage deals.

Overall, 2009 was the weakest year for fundraising since 2003. Investors committed only $15.2 billion to 120 funds last year, down from $28.6 billion in 223 funds in 2008, which was also a difficult year for fundraising activity. In 2007, investors committed dollars to 250 funds. Last year fewer funds were raised than any year since 1993. The NVCA report suggests that the decrease in the number of funds points to an industry that is rebuilding itself as a leaner, more efficient enterprise, with fewer firms and more experienced investors.

Though there were some signs of improvement in venture-backed exits last year, the last two years have been the weakest consecutive years for initial public offerings (IPOs) since the mid-seventies. Mergers and acquisitions (M&A) remained low in 2009, though during the fourth quarter, the the total disclosed value of M&As grew to its highest level since the end of 2007. The number of IPOS more than doubled in 2009 over the previous year, increasing from 6 to 13, but not approaching the 86 IPOs that occurred in 2007.

Two recent surveys, however, indicate that venture capitalists are optimistic about the industry's prospects in 2010. A KPMG survey of 100 venture capitalists and entrepreneurs in the U.S. found that most expect an industry revival in the coming year, with increases in dealflow, total investment dollars, valuations, fundraising and exits. Last year, 88 percent of the respondents predicted that activity would remain flat or decrease. This year, 79 percent expect an increase in investment activity, though that increase is predicated on the extremely low levels of activity in 2009.

Read the KPMG report at: http://www.prnewswire.com/news-releases/venture-capitalists-turn-positive-on-investment-levels-and-ipos-in-2010-kpmg-study-finds-80711702.html.

NVCA's annual survey of industry predictions from venture capitalists also found that the community expects an increase in investments, but revealed more diversity in expectations of where the industry is headed. Sixty-three percent of respondents predicted an increase or continuation of 2009 levels of investment. Most of the sample also expect more or the same number of companies will receive venture capital. Though this might be good news for entrepreneurs seeking capital, respondents also expect the venture industry as a whole to contract in the near future. Ninety percent believe that the number of venture firms will decrease over the next five years, and that an increasing amount of U.S. venture capital investments will focus on later-stage deals and opportunities overseas.

Read the survey results at: http://www.nvca.org/index.php?option=com_docman&task=doc_download&gid=531&Itemid=93.

Find additional venture capital updates at: http://www.nvca.org/.