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PwC MoneyTree VC Survey - Q1 2004
By Steve Bengston - Managing Director, Emerging Company Services, PricewaterhouseCoopers
VC investment in the US decreased 13% in Q1’04 to $4.6 Billion, vs Q4’03, but was up 10% vs Q1’03. The past 7 quarters have all been between $4.2 and $5.3 Billion, so we appear to have reached a predictable level of investment in the $4-5 Billion per quarter range for the foreseeable future. If this trend continues, 2004 would again total around $18-20 Billion. This would be the first year since 1994 we have not had at least a 15% change up or down, so don’t bet on stability quite yet. To put these fluctuations into perspective, virtually every year from 1983 to 1991 changed less than 15% from the prior year.
Silicon Valley remained the #1 area for investment in Q1’04, getting 29% of the dollars. The other top 5 markets receiving funds were:
2. New England: 16%
3. Southeast: 8%
4. San Diego: 6%
5. Midwest: 6%
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.
Software regained the #1 category with roughly 21% of the vc dollars, although Biotechnology was a very close #2. The other top 5 sectors in Q1’04 were:
2. Biotechnology: 21%
3. Telecommunications: 12%
4. Networking & Equipment: 8%
5. Medical Devices & Equipment: 7%
Later stage investment still commands a high percent of the vc total, with roughly 22% of vc dollars going to Series E or later. Investment by round for Q1’04 was:
Series A: 19%
Series B: 17%
Series C: 16%
Series D: 25%
Series E+: 22%
Series A appears to have stabilized at roughly 20% of the dollars invested and 25% of the # of deals. Series A remains below the total of Series E+, which indicates a large number of companies are being kept afloat and that returns to venture capital will remain poor by historical standards, and that the equilibrium level of investment is below 2003’s $18B.
Median deal size has remained roughly $4-5 Million for 13 consecutive quarters, indicating the companies that can raise money can raise substantial amounts.
Average pre money valuations dropped again in 2003, as follows
| Stage | 2001 | 2002 | 2003 |
| Early Stage | $21.2M | $11.7M | $8.3M |
| Expansion Stage | $49.0M | $29.9M | $29.6M |
| Later Stage | $81.0M | $51.0M | $54.8M |
Top Private Equity firms as defined as # of deals in Q1’04 were:
1. Sequoia 18 Deals
2. Menlo Ventures: 16 Deals
3. Alta, NEA: 14 Deals
5. Mobius: 13 Deals
Venture firms appear to have settled into two camps:
1. Veteran Firms on at least their 4th fund. Little fear of raising a new fund. GP’s are generally senior ex-operating execs. These firms are generally quite aggressive, making significant number of investments in 2003 and plan to continue doing so in 2004
2. 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 Series A 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. They are also often bidding up valuations on later stage financings of top tier funds’ deals, again hoping to get a quick, lucrative exit and save the fund.
LP’s appear conflicted over continued investment in vc funds. The 20 year IRR for all vc’s has dropped to 15.5%, barely above NASDAQ’s 12.4% or S&P’s 12.9% over the same 20 years. Additionally, most of the returns in the venture industry are in the top quartile of funds. Consequently, even though many LP’s want to invest heavily in the venture industry, they are not able to get into the top funds and are hesitant to invest in firms that have not demonstrated consistent returns above NASDAQ. Ironically, this has produced more interest in first time funds, particularly if the GP’s have a good investment history individually.
This concern over returns will likely shrink the vc industry over the next few years from its current run rate of $18-20B annual investors. A number of analysts now speculate the “equilibrium” rate of investment is $10-12B annually, roughly the level of investment in 1996.
Please visit www.pwcmoneytree.com for full report on the PwC MoneyTree VC Survey.
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