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08

Nov

2013

Corporate Venture Numbers Show Strong Growth through Q3 PDF Print E-mail

John Taylor

Written by John Taylor   
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For corporate VC investors, the numbers are in – at least through Q3 2013. They indicate that more than 17 percent of all venture deals involved at least one corporate VC, as tracked by the MoneyTree™ Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters.  In addition, the percentage of dollars put into those deals by corporate VCs has doubled from 2009 levels. If current trends continue, 2013 could be the first non-bubble year since 1995 that corporate groups have provided more than an estimated 10 percent of total venture dollars.

The nine-month totals for 2013 indicate 145 disclosed corporate VC groups (plus an unknown number that submitted data but requested anonymity) invested an estimated $2.4 billion in 499 deals.  The total dollars exceed the total for all of 2012. We should note that part of the increase may stem from increased outreach to the corporate VC community on the part of NVCA and Thomson Reuters. However, the higher measured activity levels are consistent with what we are hearing in the field.

As with U.S. venture capital broadly, corporate VCs overwhelming chose the software sector, which captured more than one third of the dollars. Corporate VC sector focus tracked broader VC fairly well, with two exceptions: Industrial/Energy (the sector where many clean technology initiatives are classified) and Computers & Peripherals, which CVC’s over-weighted slightly.

In our latest tabulation, we broke out corporate VC investment in the life sciences for the first time. In the first nine months of 2013, corporate VCs invested an estimated $527 million in 90 life science deals. The MoneyTree report indicates 44 disclosed Corporate VC investors participating in this space, as well as a number of undisclosed investors. Through Q3 of 2013, we estimate that corporate VCs provided more than 10 percent of the dollars going to life science companies.

The full data file is available on the Corporate Venture Group page of the NVCA website.

 

31

Oct

2013

Q2 Performance Release Marks Two Debuts PDF Print E-mail

John Taylor

Written by John Taylor   
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Thursday’s second quarter venture performance release brought good news and marked two significant firsts for NVCA and Cambridge Associates. First, the news: Venture capital performance improved significantly across nearly all time horizons as of June 30, 2013, according to the Cambridge Associates LLC U.S. Venture Capital Index®, the performance benchmark of the National Venture Capital Association (NVCA). More details can be found in the press release and the benchmark report.

This release also marks the first time that Cambridge Associates (C|A) has compared venture returns to public market returns using its new Modified Public Market Equivalent (mPME). This proprietary methodology helps investors to compare the returns they achieve on their private investments against what they would have earned had they invested the same funds in the public markets instead. Evaluating private vs. public investing strategies is an age-old dilemma for investors – and a tricky one, given that the metrics for measuring public and private returns do not provide an “apples to apples” comparison of the two. C|A’s mPME takes a novel approach to this problem by “consistently quantifying the relative performance of public and private investments added across funds, strategies and portfolios, with a minimum of external assumptions and adjustments,” as described by C|A.

The private-public question is also one that venture capitalists have been fielding more often over the past decade. We now believe we have more accurate answers, thanks to the mPME. Over time horizons greater than 15 years, U.S. venture capital has dramatically outperformed the public markets. By way of example, and at the risk of grossly oversimplifying, let’s consider that the C|A mPME venture 15-year annualized net IRR is 22.79 percent. By comparison, the C|A mPME S&P 15-year annualized IRR is 5.31 percent. This indicates that venture outperformed S&P by 17.48 percent on an IRR basis over the past 15 years. Thus, the C|A mPME S&P Value-Add equals +17.48 percent (also expressed as +1,748 basis points).

That said, over the past decade it has been tougher for funds to outperform the public market alternatives. Therefore, it’s likely that investors making commitments to future funds will maintain their focus on top quartile funds.

Our Q2 performance release also heralded the debut of growth equity as a distinct segment in the U.S. Venture Capital Index.  This recognizes the rising importance of growth equity in the venture-innovation ecosystem and represents a significant step in NVCA’s effort to integrate growth equity into the larger venture story.

 

29

Oct

2013

Patent Assertion Study Confirms Growing Costs and Burdens to Innovative Companies PDF Print E-mail

Jennifer Dowling

Written by Jennifer Connell Dowling   
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On Tuesday, NVCA and Robin Feldman, Professor of Law and Director of the Institute for Innovation Law at University of California Hastings, released the findings of a survey of VCs and portfolio companies regarding their recent experiences with patent assertions. Titled “Patent Demands & Startup Companies: The View from the Venture Capital Community,” the study confirms what we’ve been hearing anecdotally from our members: The current patent system is working well for some portfolio companies, but not for others.  Specifically:

  • Among respondents, 70 percent of venture capitalists and one in three startup companies report having received patent assertions. Eighty percent of survey respondents indicated that the number of patent demands they have received has increased over the last five years.
  • Seventy percent of VCs identified IT as the industry sector most impacted by patent demands, followed by life sciences (30 percent) and clean tech (10 percent).  Additionally, 60 percent of VC respondents reported that patent demands came from entities whose core activity is licensing or litigating patents.
  • Sixty percent of VC respondents estimate that the average cost per company to prepare for and defend against patent demands exceeds $100,000, with some reporting costs in the millions of dollars.
  • Seventy-five percent of VC respondents and 60 percent of CEOs reported that patent demands had either a highly or moderately significant impact on the companies that received them, including distracting management, expending resources, or altering business plans.
  • Seventy percent of VC respondents said they do not believe patent assertions are positive for the startup community.  Further, every VC respondent indicated that an existing patent demand against a prospective portfolio company could factor into his or her decision to invest in that company, while 50 percent said it would be a major deterrent.

As more startups are targeted by patent monetizers, more resources will be devoted to litigation rather than to innovation.  Lawmakers such as Rep. Bob Goodlatte (R-VA) have taken notice, but balancing the need for reform with the need to maintain strong protection for patent-dependent startups will be a critical challenge going forward.

Last Updated on Tuesday, 29 October 2013 12:21
 

24

Oct

2013

Adding Growth Equity to the Venture Story PDF Print E-mail

Janice Mawson

Written by Janice Mawson   
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Since its launch in January 2013, NVCA’s Growth Equity Group (GEG) has certainly lived up to the “growth” portion of its name. The group currently comprises 53 member firms, and drew more than 100 participants to its latest member conference call last week, during which GEG Chair and NVCA Board Director Bruce Evans (Summit Partners) introduced members to new NVCA President and CEO Bobby Franklin, and updated call participants on GEG’s strategic objectives in the coming months.

Chief among these goals is integrating the growth equity narrative into the larger venture capital story. For the uninitiated, growth equity focuses on the final stages of the venture investment life cycle.  In an environment where exit runways remain long (relative to historical norms), growth equity provides a critically important private alternative for the capital needs of maturing startups.  Companies generally use growth equity funding to continue developing technology, expand market share or enter new markets, and hire new employees. GE investments are typically unlevered or only lightly levered at purchase, and returns are primarily driven by growth. More information can be found at NVCA’s Growth Equity Group page.

Of course, NVCA has been telling venture capital’s story on Capitol Hill for decades with industry-standard research and compelling anecdotes about the companies and technologies venture helps to fund. Now, we are working in earnest to add growth equity to this narrative. On the research front, GEG has been working with Cambridge Associates to develop a category definition for growth equity that makes sense under the larger venture umbrella, as well as a benchmark to help compare its performance with other venture stages. Regarding anecdotes, GEG is asking members and potential members to share their stories with GEG board members so that we can begin to integrate them into the group’s communications efforts with policy-makers, the public and the press. If your firm is active in the growth equity space, or if you have invested alongside a growth equity firm in a successful round, GEG wants to hear your story. You can share it by contacting Bruce Evans at bevans@summitpartners.com, or Janice Mawson at jmawson@nvca.org.
 

22

Oct

2013

TRANSFER Act Aims to Aid Tech Transfer between Labs and Startups PDF Print E-mail

Emily Baker

Written by Emily Baker   
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Throughout its history, NVCA has strongly supported the allocation of federal funds for research at universities, nonprofit research institutes and federal laboratories. That’s because America’s entrepreneurs often take the groundbreaking discoveries generated in these settings today and turn them into the life-saving and life-changing products of tomorrow. However, this process can only take place if the innovative breakthrough is transferred successfully from the lab to a startup that can develop it and bring it to market.

In recent years, this transfer has become increasingly difficult. Specifically, a funding gap has emerged between the discovery stage for transformational technologies and their commercialization. This gap has slowed or blocked the path to market for countless innovations. Fortunately, help may be on the way in the form of the Technology and Research Accelerating National Security and Future Economic Resiliency (TRANSFER) Act of 2013. The TRANSFER Act aims to address the funding gap directly by enabling faculty and researchers at America’s research institutions to undertake proof-of-concept, scaling up, and modeling research for technologies that many investors may consider too early-stage to fund.  NVCA believes that this will help fill the funding gap and speed new research discoveries more efficiently to the marketplace, where they can benefit all Americans. In the process, it will increase the impact of every federal dollar spent on research, spur the creation and growth of innovative startup companies, and generate jobs and economic growth.

NVCA commends The House Science Committee for its bipartisan work on this legislation – including its Chairman Lamar Smith (R-TX) and Ranking Member Eddie Johnson (D-TX), and the leadership of the Research and Technology Subcommittee Chairman Larry Bucshon (R-IN) and Ranking Member Dan Lipinski (D-IL) - for its work on the TRANSFER Act of 2013. The committee’s commitment to dialogue and stakeholder engagement has produced a bill that is practical, measured and capable of drawing broad bipartisan support. For these reasons, NVCA looks forward to the opportunity to assist and support the passage of this bill in any way it can.
 

18

Oct

2013

There’s Reason for Optimism in Q3 MoneyTree Report PDF Print E-mail

John Taylor

Written by John Taylor   
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Amidst the talk of economic gloom and doom in D.C. this week, the MoneyTree™ Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters, provided some encouragement for venture capitalists, innovators and entrepreneurs. Early Stage dollar investments rose to their highest level in 12 years, rising 7 percent in dollars and 8 percent in deals.  In fact, Seed/Early stage deals accounted for 58 percent of total deal volume in Q3, a record percentage for a single quarter. (Full data can be accessed here.) These figures bode well for the future of innovation. 

The strong investment numbers in the Software sector also provide cause for optimism. Software investment in the third quarter reached $3.6 billion, which marks the first push over $3 billion for a quarter in 12 years.  The Software industry also counted the most deals in Q3 at 420, a 23 percent increase from the 342 rounds completed in the second quarter of 2013.  Finally, nine of the 11 largest investments in Q3 went into Software companies. These numbers speak to the continued preference of investors for deals that require less capital to get to proof of concept. That’s good news for software companies, of course, but less encouraging for more capital-intensive sectors.

The picture isn’t entirely rosy, however. While the next generation of companies may have gotten a healthy boost this quarter, many VCs are still trying to gain exits for the previous generation of companies. While this month’s Exit Poll report by Thomson Reuters and NVCA indicated some improvement on that front, we would like to see it strengthen even further. Unfortunately, uncertainty in Washington and in the public markets of the kind we witnessed earlier this week won’t help matters. That said, the strong showing in the Seed, Early Stage and Software sectors in Q3 suggests that VCs remain undaunted, and that the outlook for America’s startup ecosystem remains optimistic.
Last Updated on Friday, 18 October 2013 11:36
 
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