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PwC MoneyTree VC Survey - Q3 2003 Summary
By Steve Bengston - Managing Director, Emerging Company Services, PricewaterhouseCoopers
VC investment appears to have stabilized at roughly $4 Billion per quarter, $16 Billion per year in the US, high by historical standards, even though far below the bubble years. If 2003 finishes at $16B, which appears likely it will be the 6th largest VC investment year ever, above any year before 1998. One of the key issues facing the VC industry is whether they can make a 20+% IRR on an investment pace of $16B. If not, LP’s are likely to reduce funding to the sector until returns reach 20% or more consistently, which is the historic average for the VC industry.
Although Q3'03 VC investment was down 8% from Q2, to $4.2B, Q2'03 was up 6% to $4.6B from Q1, the first quarterly increase after 12 consecutive quarterly declines. The past 5 quarters have all been between $4.1 and $4.6 Billion, so we appear to have reached an equilibrium level of investment in the $4-5 Billion per quarter range for the foreseeable future.
Software generally is the #1 category with roughly 20% of the VC dollars, although Biotechnology edged out Software for #1 for the first time ever in Q3'03. The other top industries receiving investment are:
3. Telecommunications
4. Medical Devices & Equipment
5. Networking
6. Media & Entertainment
7. Semiconductors
8. Computers & Peripherals
9. IT Services
10. Industrial/Energy
California continues to dominate private equity investing. Silicon Valley is #1 with roughly 35% of the market, and Southern California (LA/Orange County/San Diego combined) now rivals New England for 2nd place. The other top markets are:
3. NY
4. Southeast
5. Texas
6. San Diego
7. LA/Orange County
8. Wash DC
9. Midwest
10. Colorado
Combined with Sacramento, California receives roughly 45% of the private equity investment in the US, which should bode well for the California economy, no matter who the governor is.
Later stage investment still commands a high percent of the VC total, with roughly 27% of VC dollars going to Series E or later. Investment by round was:
Series A: 18%
Series B: 20%
Series C: 18%
Series D: 16%
Series E+: 27%
Series A as % of total has declined to about 18% of the total dollars and 22% of the total number of deals, but appears to have stabilized at these levels. More money is going into Series E+ deals than Series A, which is unusual historically and does not bode well for VC returns in the near term.
Median deal size has remained roughly $4 Million for 6 quarters, indicating the companies that can raise money can raise substantial amounts. In fact, the #1 Software investment in the US in Q3’03 was $47 Million to BlueArc Corp in Silicon Valley
Top Private Equity firms as defined as # of deals in Q3'03 were:
- NEA: 16 Deals
- Draper Fisher Jurvetson: 13 Deals
- USVP: 12 Deals
- JP Morgan: 11 Deals
- Crossbow Ventures, St. Paul, Sutter Hill, Warburg Pincus: 10 Deals
Over 50% of all deals are insider only, so it is clearly very tough to bring in new investors. New companies should focus on creating a syndicate at Series A that can fund them through liquidity. Otherwise, CEO’s will likely spend excessive amounts of time trying to raise money from new investors, with a low probability of success.
Venture firms appear to have settled into two camps:
- Veteran Firms on at least their 4th fund. Little fear of raising a new fund. GP’s are generally ex-operating execs. These firms are generally quite aggressive, making significant number of investments
- New funds, less than 4 funds under their belt. Significant fear of raising a new fund, GP’s often have little or no operating experience. These funds are generally quite cautious at making new investments, focusing on keeping their existing companies alive that appear to have a chance at a decent exit, hoping one of them can save the fund and allow them to raise another fund.
Please visit www.pwcmoneytree.com for full report on the PwC MoneyTree VC Survey.
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