Reports on Venture Capital Investments for 2011 Show Mixed Results

While there has been a lot of concern recently about the level of investment (and expected investment) in early-stage companies, some recent data suggest that the climate isn’t as bad as we thought, although there continues to be a lot of room for improvement.

According to a MoneyTree Report (which is prepared by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters), approximately $28.4 billion of venture capital investments were made nationally in 3,673 deals last year. This represented a 22% increase in terms of dollars, and a 4% increase in the number of deals, compared with 2010. Investments were up in all stages of company development, except for seed stage investments, which were down 48% compared with 2010. Locally, venture capital investments in Minnesota-based companies were up to almost $265 million in 2011, which is about a 78% increase over the nearly $149 million invested in 2010.

I won’t bore you with all the details in the report, which you can read for yourself. But I did find a couple of things especially interesting.

First, investments were up in almost all industry categories, particularly for software, Internet-based, biotechnology, medical device, and clean technology companies. I was not surprised by the software and Internet-based company results, as—at least locally (see more below)—this area seems very active. I suspect it has something to do with the lower capital needs of those companies, and the quicker path to exit based on fewer regulatory hurdles. I was surprised, however, to see that investments were also up in several other industries, especially the medical device and biotechnology industries. Personally, I’m aware of several companies in those areas that have had difficulty raising capital. Apparently, while raising capital remains a challenge for those companies, well-valued deals are still getting done.

Second, I wasn’t surprised that investments in seed stage deals were down, although the 48% decrease seemed high. Based on my own experience, seed stage companies are still finding it difficult to attract investment right now, although the right types of deals (with the right valuations) seem to be getting done. I think the difficulty is in part based on the fact that venture capital investors don’t seem to invest in seed stage deals anymore, so there are fewer investors (angels) willing to look at these companies. Instead, venture capital investors tend to invest almost exclusively in more experienced companies, those whose path to exit is shorter. Indeed, the MoneyTree Report shows that later stage investments were up 37% last year. One thing that is helping this trend locally, at least, is the Minnesota Angel Tax Credit. For 2011, all $15.9 million of tax credits available for allocation was subscribed. For 2012, Minnesota will have $12 million of credits available. I wouldn’t be surprised if that too was fully subscribed well before the end of this year.

While local deals were up in 2011, one real bright spot was investments in tech deals. According to this TECHdotMN article, more than twice as much money was invested in Minnesota tech deals in 2011 as was the case for 2010. The report defines tech to include IT, web, mobile, SaaS, and hardware companies. 2012 is also off to a good start for local tech deals, based on the recent announcement of a $52.5 million investment in Code 42 Software, Inc. 

We hope the economy will continue its recovery from the meltdown in 2008/2009, and more early-stage companies will get funded in 2012.