Q1 2012 Venture Market Starts Slow

VCs remain cautious as dollars, deals start low in 2012: Source: WRAL Tech Wire

Funding for startups fell 19 percent in the first three months of the year, as cautious venture capitalists funneled less money into fewer deals.

VCs invested $5.8 billion in 758 deals in the first quarter of 2012 compared to $7.1 billion in 889 deals during the same period in 2011, according to the latestMoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association, based on data by Thomson Reuters.

According to the study, quarterly VC activity fell 19 percent in terms of dollars and 15 percent in the number of deals compared to the fourth quarter of 2011.

North Carolina was ranked 14th nationally in VC deals last quarter with a little more than $15 million invested in seven companies. California ranked No. 1 with 294 deals for more than $3 billion.

There were four companies in Durham that received deals: Sarda Technologies; SCYNEXIS; Semprius; and Zift Solutions. Three others were in Charlotte: Adaptivity; Conclusive Analytics; and Forest2Market, Inc.

Nationally, the companies receiving deals were mainly in the Internet, energy, and medical device sectors in the later stages of development. The Life Sciences (biotechnology and medical device industries combined) and Clean Technology sectors saw marked decreases in both dollars and number of deals in the first quarter.

However, there were double-digit percentage increases in dollars invested in the Consumer Products and Services, Medical Device, and Telecommunications industries. Additionally, investments into companies in the later stage of development experienced an increase, rising 11 percent and accounting for 40 percent of total dollars invested during the first quarter of 2012.

Industry Analysis

Software industry received the highest level of funding for all industries with $1.6 billion invested during the first quarter. This level of investment represents an 18 percent decrease in dollars, compared to $2 billion invested in the fourth quarter. The Software industry also had the most deals completed in Q1 with 231 rounds, which represents a 12 percent decrease from the 262 rounds completed in the fourth quarter of 2011.

Biotechnology industry was the second largest sector for dollars invested with $780 million going into 99 deals, falling 43 percent in dollars and 14 percent in deals from the prior quarter. The Medical Devices and Equipment industry experienced an increase, rising 33 percent to $687 million, while the number of deals dropped 6 percent to 72 deals. Overall, investments in the Life Sciences sector fell 22 percent in dollars and 11 percent in deals, which was the fewest number of deals since the first quarter of 2009.

Internet-specific companies, whose business model is fundamentally dependent on the Internet regardless of the company’s primary industry category, received more than $1 billion for the eighth consecutive quarter with $1.4 billion going into 188 deals. This investment level is 3 percent lower in dollars and 23 percent lower in deals than the fourth quarter of 2011 when $1.4 billion went into 244 deals. Two of the top ten deals for the quarter were in the Internet-specific category.

Clean Technology sector saw $951 million go into 73 deals, representing a 30 percent decrease in dollars and an 11 percent decline in deals compared to the fourth quarter of 2011. Three of the top deals from the quarter were classified as Clean Technology investments.

Eleven of the 17 MoneyTree sectors experienced decreases in dollars invested in the first quarter, including Semiconductors (43 percent decrease), IT Services (26 percent decrease), and Industrial/Energy (14 percent decrease). The Consumer Products & Services sector experienced a 78 percent increase during the quarter due to the largest deal of the quarter ($238 million) occurring in that sector.

Stage of Development

Seed stage investments fell 9 percent in dollars and 41 percent in deals with $141 million invested into 53 deals in the first quarter. The average Seed deal in the first quarter was $2.7 million, up from $1.7 million in the fourth quarter. The average Early stage deal was $5.6 million, down from $6.1 million in the prior quarter.

Expansion stage dollars decreased 32 percent in the first quarter, with $1.7 billion going into 207 deals. Overall, Expansion stage deals accounted for 27 percent of venture deals in the first quarter, a slight uptick from 26 percent in the fourth quarter of 2011. The average Expansion stage deal was $8.3 million, down from $10.9 million in the prior quarter.

Investments in Later stage deals increased 11 percent in dollars and 13 percent in deals to $2.3 billion going into 208 rounds in the first quarter. Later stage deals accounted for 27 percent of total deal volume, compared to 21 percent in Q4 when $2.1 billion went into 184 deals. The average Later stage deal in the first quarter was $11 million, which decreased slightly from $11.2 million in the prior quarter.

First-Time Financings

First-time financing (companies receiving venture capital for the first time) dollars decreased 22 percent to $783 million, the third lowest level in survey history. And, the number of deals fell 28 percent to 195 deals in the first quarter, the lowest level since the third quarter of 2009.

First-time financings accounted for 14 percent of all dollars and 26 percent of all deals in the first quarter, compared to 14 percent of all dollars and 30 percent of all deals in the fourth quarter of 2011.

Companies in the Software, Media & Entertainment, and IT services industries received the most first-time rounds in the first quarter. The Life Sciences sector experienced a dramatic drop, falling 60 percent in dollars and 43 percent in deals during the first quarter to $120 million going into 21 companies. The average first-time deal in the first quarter was $4.0 million, up slightly from $3.7 million in the prior quarter. Seed/Early stage companies received the bulk of first-time investments, garnering 81 percent of the deals.

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices in Charlotte, NC, the Triangle, the Triad, Southern Pines, and Wilmington with a team of more than 30 professionals serving more than 100 companies throughout the region.