Useful Stats: U.S. Venture Capital Dollars and Deals, 1995-2009

Last year, U.S. venture capital investment dropped to its lowest level in over a decade, according to data from the PricewaterhouseCoopers Moneytree Survey and the National Venture Capital Association (NVCA). This drop was fueled by the national economic crisis, which created a number of issues within the industry. Cash-strapped investors were less willing to make risky investments, venture firms avoided fundraising campaigns because of the overall climate, fewer venture-backed companies achieved successful exits and many venture capital firms dedicated their investments to supporting their portfolio companies (see the January 27 issue). This week's Useful Stats column provides an overview of venture industry investment over the past 15 years, and what recent trends might mean for the industry.

Venture investment fell from $28.3 billion to $17.7 billion in 2009, a 37.5 percent decrease from 2008. The number of venture capital deals fell by 26.6 percent to 2,795. Average deal size fell by 14.9 percent to $6.3 million. A number of factors contributed to the reduction in overall deal size, including an increase in seed- and early-stage investment and a reduction in the size of later-stage deals, even as larger, later-stage firms have come to represent a larger share of portfolio companies.

The 2009 drop was significant, but, on a larger scale, the industry has experienced little growth over the past few years. After the high water mark of 2001 when venture investment hit an astonishing $105 billion, investment levels slid to $22 billion and then $19 billion in 2002 and 2003. For a while, it appeared as though industry activity would climb again to ever-increasing height, albeit more slowly. After peaking in 2007, however, with $30 billion the industry had experience two consecutive years of decline.

SSTI has prepared a table, based on PricewaterhouseCoopers/NVCA data, presenting venture investment levels over the past 15 years. The data includes annual venture dollars, per capita dollars, annual venture capital deals and average deal size in dollars. Population estimates are based on the U.S. Census Bureau Annual Population Survey.

The SSTI table is available at: http://www.ssti.org/Digest/Tables/031010t.htm.

PricewaterhouseCoopers Moneytree survey reports and historical data are available at: http://www.pwcmoneytree.com.

Many in the field are now reconsidering investor expectations and what the venture capital industry means to American innovation and regional tech-based economic development as a result. Successful exits are rare, risks are high, investments require time-consuming guidance to become profitable and returns are lower. Industry activity appears to be settling into a more modest equilibrium and, as mergers & acquisitions (M&As) become the most common form of exit, the payoffs for investors are not the sky-high returns of the dot-com boom.

A report based on a recent panel discussion at the San Francisco campus of the Wharton School of Business argues that these changes may permanently have altered the way the industry works, but do not represent the twilight of the industry. Although returns are smaller, venture-backed companies still generate a fifth of U.S. GDP, according to an NVCA publication cited in the report. Panelists agreed that long-term industry health will depend on changes in industry regulation and federal support for the venture capital industry. The industry also must work to encourage initial public offerings (IPOs), since the M&A and IPO markets are interconnected.

Read Saying Goodbye: New Exit Strategies for Today's Venture Capitalists at: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2440