Update on Venture Capital Investing

Earlier this year, I wrote about the state of venture capital investing nationally and locally, based in part on data from the 2010 year-end MoneyTree^TM Report by PricewaterhouseCoopers and the National Venture Capital Association analyzing data from Thomson Reuters. Just this past week a new MoneyTree Report^TM , detailing venture capital investments during the first quarter of 2012, was released. This Report shows that venture capital investments were down in this most recent quarter relative to the fourth quarter of 2011, both in terms of the total amount invested and the number of deals completed.

On a national level, a total of $5.8 billion was invested in 758 deals during the first quarter of 2012, which represents a 19% decrease in the amount invested and a 15% decrease in the total number of deals from the fourth quarter of 2011. The decreased investment was felt broadly across most sectors, as 11 of the Report’s 17 industry classifications saw declining investment in the first quarter of 2012 from the fourth quarter of 2011. 

In contrast to the national numbers, the Report shows that venture capital investments in Minnesota-based companies were up for the first quarter of 2012 compared to the fourth quarter of 2011. Minnesota-based companies raised $70.5 million during the first quarter of 2012, compared with $42 million during the fourth quarter of 2011.

The largest of the six local deals involved software company Code 42 Software, Inc., which raised $52.5 million in a round led by Accel Partners. This continues a trend in favor of investments in software and Internet-based companies. On a national level, the software sector was the category receiving the largest amount of venture capital investment in the first quarter of 2012, both in terms of dollars invested ($1.6 billion) and the number of deals completed (231).

Interestingly, of the six reported Minnesota deals during the first quarter of 2012, only one was for a medical device company. Historically, medical device deals have accounted for a large percentage of venture capital investments in Minnesota. And, while most sectors experienced a decrease nationally, investments in medical device companies during the first quarter of 2012 were up 33% nationally from the fourth quarter of 2011.

The low number of medical device deals for local companies this past quarter is probably just an anomaly of quarter-to-quarter fluctuations. By the end of the year, the number of medical device deals will likely be closer to historical averages. However, as noted in this Star Tribune article, there is a lot of uncertainty in the medical device sector, fueled in part by regulatory concerns and a longer path to exit for medical device companies. Unless these concerns diminish (particularly on the regulatory front), in the long run we will likely see less investment in the medical device industry. This would not be good for Minnesota.