A look at third quarter and year-to-date corporate venture capital (CVC) investment data shows some strengthening and a dramatic sector shift. These results are compiled from the official PwC/NVCA MoneyTree™ Report, with data provided by Thomson Reuters.

Since 2002, corporate venture groups have participated in between 12.6 percent and 18.0 percent of all US venture capital deals. While the activity levels in 2009 and YTD 2010 are at the bottom end of that range, we have seen an uptick in 2010. Readers of various NVCA research reports know that we often compare the size of the 2009-2010 industry to the 1997-1998 levels. In 1998, CVC groups participated in 500 venture deals full year and in the first three quarters of 2010, there were 321 such deals – a similar pace.

In terms of dollars invested, since 2002 CVC groups have provided between 6.5 percent and 9.3 precent of all capital. In the first three quarters of 2010,  CVC groups have provided 8.6 percent of the capital – near the top of the range and the highest portion since 2002.

A look at recent quarters gives more detail those trends. In each of the three quarters YTD, CVC groups were a part of roughly 110 venture rounds.

The shift in sector preferences is dramatic and driven by a move to corporate clean tech investing.   Thus far in 2010, 26.7 percent of all CVC dollars went to the Industrial/Energy sector which is dominated by clean technology companies. This compares with 14.6 percent of all VC going Industrial/Energy YTD 2010 and is more than double the portion of CVC dollars going to Industrial/Energy in 2009 (11.7 percent).  In fact, while CVC groups provided 8.6% of capital overall, it provided 15.8% of all the investment in Industrial/Energy.  Other strong sectors within CVC investing include biotechnology (24.8 percent of all CVC dollars) and Software (11.7 percent of all CVC dollars).

Link to detailed corporate venture capital data through Q3 2010:

CVC Quarterly Investment

CVC Annual Investment

CVC Industry Sector Splits

Today the European Parliament and Council announced an agreement on the Alternative Investment Fund Managers (AIFM) Directive.  This agreement is scheduled for a vote by the Parliament on November 10th.  Our colleagues at the British Private Equity and Venture Capital Association (BVCA) and the European Private Equity and Venture Capital (EVCA) both issued statements expressing continued concern with the directive.  We at NVCA are currently reviewing the directive in its entirety to fully understand the potential impact on US venture funds.  Once that process is complete, we will communicate our understanding of implications for our members that either have European limited partners, seek to raise funds in Europe, or plan to invest in European companies. 

The BVCA and EVCA statements follow: 

BVCA STATEMENT ON THE AIFM DIRECTIVE

Commenting on the agreement between representatives of the EU Council of Ministers and the European Parliament on the AIFM Directive today, Simon Walker, Chief Executive of the BVCA, said:

"At the outset of this process a faction in the European Parliament explicitly sought to place a regulatory ball and chain on private equity and venture capital with the objective of all but destroying it, regardless of the consequences for employment and pension funds across the EU. As late as this summer it looked as if they might have found enough key allies within the member states of the EU to succeed in this misguided ambition. The Directive agreed today, however, which presumably will be approved by the European Parliament next month, is, in a number of respects, a major improvement on what it might have been. In a series of sensitive areas, radicals within the Parliament have been obliged to trade substance for symbolism. This is because the sector has made its case with vigour. The prospect of a genuine EU “passport” is also a truly encouraging one.

This remains, though, a defective Directive. The EU has taken a hostile interest in the wrong industry at the wrong time and for the wrong reasons. No serious analyst has concluded that private equity (let alone venture capital) caused the economic crisis or served to enhance it. These regulations will needlessly increase costs and disproportionately impose burdens. This is especially disturbing in the case of larger venture capital houses, a set of institutions which it is the stated aim of the European Union that it wants to foster. There are many sections in this text which are ambiguous, inconsistent or incoherent. This means that the detailed procedure for translating this Directive into national law becomes unusually important. The BVCA along with the EVCA will dedicate much of the next two years to a forensic involvement in the critical implementation phase of this exercise.

Europe is still at risk of actively discouraging this sort of investment at precisely the moment when it needs to ensure a collective economic recovery. This would be an act of folly akin to a drowning man waving away a rescue boat because he did not like the colour of it. Private equity and venture capital stand ready to play a powerful and positive role in Europe’s economic future. The question remains whether the EU wants this to occur.”

EVCA STATEMENT  THE AIFM DIRECTIVE

This morning, the European Parliament and Council reached an agreement on the Alternative Investment Fund Managers’ Directive. The text will be subject to a full Parliamentary vote on November 10th.

Commenting on the agreement, Uli Fricke, chairwoman of the European Private Equity and Venture Capital Association, said:

“Europe’s private equity and venture capital is a relatively young industry, and yet it has become an important contributor to investment into EU companies and innovation, and to corporate governance best-practice. As such, we will embrace the responsibilities and opportunities that being regulated entails.

The AIFM Directive that will be voted on next month is an imperfect legislation. It will impose unnecessary cost for our investors and ultimately Europe’s pensioners, as well as unfair burden on companies we invest in to help them grow.

Most worryingly, there is no light-touch opt-in for small funds envisaged in this Directive. This will have a damaging knock-on impact for financing of innovative SMEs. The European Commission should urgently address this disproportionate burden that jeopardizes a European recovery based on innovation and knowledge.”

We are relieved to have reached some legal certainty, which is particularly important for our long-term fund investors. We will now work constructively to ensure that the implementation of these and other relevant initiatives, such as Solvency II, do not inhibit SMEs and innovative companies’ access to capital or the promotion of long term investment within the EU.”

Commenting on the legislative process around the AIFM Directive, Ms Fricke said:

“This process was flawed in its failure to fully account for differences between vastly different types of fund manager. Imposing rules intended to cover short term securities trading on private equity, venture capital and other closed-ended funds investing in the real economy has proved illogical. We call on policy makers and regulators, both at EU and national level, to acknowledge the importance of drawing such distinctions in implementing the Directive.”

Since the September 8^th launch of the Medical Innovation and Competitiveness (MedIC) Coalition, we have attracted a solid group of 37 VC firms and 39 portfolio companies as charter members.  With this foundation in place, we are moving forward adding new members each day to our collective voice.  

On November 18-19, the MedIC Advisory Board is planning a Washington, D.C. fly-in.  Meetings are scheduled with White House and HHS officials to discuss the importance of bringing medical innovation to the forefront of the healthcare reform implementation and the need to appoint a medical innovation advocate within the Administration.  We will also be meeting with the leaders of the key health related trade groups to discuss ways to partner on innovation issues in the next Congress.

Membership to MedIC remains open to all NVCA members investing in life sciences and their portfolio companies.  Please contact me (kslone at nvca (dot) org) for more information.

While carried interest and financial reform have been our primary focus at NVCA these days, there are numerous pieces of legislation that we have been working on that remained outstanding as Congress recessed for elections.  Here is an overview and what to expect when they return:

Small Business Innovative Research (SBIR) Grants

The Senate and House both passed legislation to reauthorize the SBIR program and make changes to the eligibility rules so that venture-backed companies could qualify for these grants.  The NVCA supported the House bill as it allowed majority venture-backed companies to participate in the program and clarified the affiliation rules whereas the Senate fell short of that.  Unfortunately, both houses have been unsuccessful in reaching a compromise. As a result, Congress passed several three-month extensions to keep the program running. 

With little expected to be completed during the lame duck session, Congress will have to start the legislative progress from scratch in the 112th Congress.  There is the chance that the SBA could decide to make eligibility changes through the proposed rule making process, but that scenario is not probable. So once again we have to be patient and wait to see what develops.

Patent Reform

Despite the progress Senator Leahy made reaching a compromise on the two most controversial issues in the patent reform debate (damages and the post grant review process), it appears that S. 515 will be left behind in the 111th Congress.  Senator Leahy and the 25 other Senators will put pressure on Senator Reid to bring S. 515 to a floor vote in the lame duck session but will likely be unsuccessful as there are still several Senators that have concerns about S. 515. 

The House has not taken any major action on the Leahy compromise, as members there do not support S. 515, including the compromise on damages and post grant review.  Given these challenges, it is unclear if Senator Leahy will have the appetite to push overall patent reform in the next Congress.  Thus, most political insiders believe that comprehensive patent reform is off the radar screen for a while. 

Immigration

There seems to be very little appetite and certainly even less time remaining in the 111th Congress to address comprehensive immigration reform. Congress and the Administration are unwilling to separate legal immigration from illegal immigration reform, which makes our position more difficult. There was a push in February 2010 to move the Start-Up Visa/Founder Visa issue when Senators John Kerry and Richard Lugar introduced their Start-Up visa bill.  Then in early March, Rep. Jared Polis hosted several VCs and entrepreneurs at a Congressional briefing on the start-up visa.  The matter received widespread support from the VC community, but unfortunately, has not seen any legislative action since then. 

In late September, Sens. Robert Menendez and Patrick Leahy introduced comprehensive legislation to overhaul the nation's immigration laws.  The bill was largely viewed as a placeholder to help spur consideration of an overhaul of immigration laws and policy when the new Congress convenes in January. 

Energy Reform

With climate change legislation failing to pass in the 111^th Congress, both Democrats and Republicans agree that this effort is off the table for the foreseeable future. Energy and Natural Resources Chairman Bingaman has publicly asserted that it will be at least 2 years, if not more, before any bills have the opportunity to be considered, regardless of how the elections turn out.  With the Republicans gaining additional seats in the House, passage of energy reform dims considerably. With likely Republican gains in the Senate, climate legislation there will also become increasingly difficult.

In absence of federal climate change legislation, it will be important to watch the California Prop 23 ballot which proposes to repeal AB 32.  This ballot initiative will be a bellwether for the future of climate change legislation in the country.  NVCA is supporting “Vote No on Prop 23” and is closely monitoring this situation.

During the lame duck session, there may be some attempt by Majority Leader Reid to get a smaller energy-only bill passed.  This would be the BP oil spill bill that he tried to pass a few weeks ago.  Alternatively, there may be an attempt to pass a Renewable Electricity Standard (RES).  NVCA has been lobbying the White House to make sure that if there is an energy bill considered during the lame duck session the RES, the establishment of a Clean Energy Deployment Administration (CEDA), and changes to the DOE Loan Guarantee Program should be included in that effort.

These issues as well as carried interest will be tracked and developments will be posted here at NVCAccess when Congress returns in November.