2011: A Good—and Bad—Year for Venture Capital

By Maria Valdez Haubrich

The fourth quarter 2011 data from the National Venture Capital Association is in and there is good news and bad news about the venture capital industry.

The good news is that the amount of money venture capital firms are investing is on the rise; the bad news is that the number of venture capital funds out there is declining. In the U.S., 38 venture capital funds raised a total of $5.6 billion in the fourth quarter of 2011, representing a dollar increase of 162 percent but a 41 percent drop in the number of funds compared to the third quarter of 2011. (In that quarter, 64 funds raised $2.1 billion.) This quarter marked the lowest number of funds raising money since the third quarter of 2009.

In all of 2011, U.S. venture capital fundraising totaled $18.17 billion from 169 funds. That’s a 32 percent increase by dollars compared to 2010, but the same number of funds.

“This past year we saw more venture capital money raised by essentially the same number of firms, a sign that consolidation within the industry is continuing,” said Mark Heesen, president of NVCA, in announcing the data. “We also continued to invest more money in companies than we raised from our investors. Both of these trends – if they continue — suggest that the level and breadth of venture investment is starting to recalibrate to reflect a concentration of capital in the hands of fewer investors. Our cottage industry is indeed getting smaller still and that will impact the startup ecosystem over time.”

How will this shakeout affect small businesses? Consolidation in financial industries generally makes it harder for smaller companies to get backing, as bigger funds with more dollars to invest are more likely to look for high returns and less likely to take risks on smaller firms without a high potential for ROI.

At the same time, a shakeout is also occurring in the IPO market. The NVCA recently reported that in 2011, 52 venture-backed companies went public, representing a value of $9.9 billion. That’s a 31 percent decrease in volume, but a 41 percent increase in dollar value compared to the previous year.

In other words, with both venture capital investment and venture-backed IPOs, the trend is toward fewer and bigger players, meaning bigger—but fewer—deals.

Image by Flickr user photosteve101 (Creative Commons)

This entry was posted on Tuesday, January 24th, 2012 at 6:00 am and is filed under Capital Access, Small Business, small business, Venture Capital. You can follow any responses to this entry through the RSS 2.0 feed.


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