From downturn to recovery – 2011 Silicon Valley venture capital stats

SVForum quarterly venture overview: 2011 year review

On Feb. 7 2012 SVForum gathered a group of venture capitalists, entrepreneurs and the business community to report on 2011 venture statistics. Following the presentation of stats, SVForum invited partners from Norwest Venture Partners, Venrock and Hummer Winblad to a panel debate on the broader outlook of the Venture Capital industry in 2012.

On the road to recovery

The general picture of the venture capital (VC) industry in 2011 once again confirms the often-cited fact that one-third of world total venture capital is located in Silicon Valley. Another one-third of the remaining capital is located in the rest of the US, while the last part is scattered around the world.

Many other stats presented also validate that Silicon Valley continue to be the strongest area in the US in terms of VC. More specific, the total amount invested in Silicon Valley was $11.6 billion in 2011 up from $9.1 billion in 2010. Compared to the New England region, which ranked second in the US, where the total amount invested was $3.2 billion in 2011 and $2.6 billion in 2010. Also, by looking at number of deals made in each region in 2011, we see evidence of Silicon Valley and its venture capital dominance, namely 1.158 deals were made compared to New England with only 441 deals.

In terms of industry-specific investments, we find that Software is the sector receiving the most funds from VCs. Software based firms received a total of $6.7 billion in venture capital in 2011, up 38% from 2010. The second most valued sector is biotechnology which raised $4.7 billion in 2011 – an increase of 22% compared to 2010.

A VC industry in disequilibrium?

From these figures, it was argued that the VC industry in general has made a smooth landing after the economic downturn that began in 2008. The total investment in 2011 was $28,4 billion, up 22% compared to 2010. This level of investment is close to reaching the levels of 2007 (and 2008 before the downturn).

On the negative side, there are some reasons for being concerned about the future of the VC industry as whole. The stats presented at the meeting also indicate a disequilibrium between the amount of VC investment and the inflow in venture capital funding. This has created a funding gap that could influence VCs ability to provide funding in the future. The gap is not a new phenomenon, indeed in the last four years the industry has had a year-end deficit of $4 billion in 2008, $3 billion in 2009, $9 billion in 2010 and $10 billion in 2011. On top of that, one of the major institutional venture capital contributors in the US, Calpers, is planning to drop their venture capital allocation in 2012 from 7% to 1%, which will further hurt VC funding opportunities for some time to come.

On a separate note, Steve Goldberg from Venrock, commented that the upcoming IPO of Facebook will funnel money back into the Angel/VC environment, providing some optimism to the entrepreneurial community in spite of the expected decline in VC fundraising.

Implications for entrepreneurs

What do these stats mean? And how will it affect entrepreneurs in 2012? The panel debate with three venture capitalists tried to address together with other issues faced be entrepreneurs and VCs.

It is clear from the comments by the panelists that requirements for getting your start-up funded by VCs is increasing. The bar will simply be set higher. VCs will be more selective and will focus even more on picking only the really good deals. The evaluation of a start-up should add up to a multi-million market potential before the start-up becomes interesting from a VC perspective. Also they want to see ideas that present a clear value proposition.

Generally the panelists commented that they give a lot of attention to the team behind the start-up. Proven record and experience with dealing with critical stakeholders to your start-up is regarded as highly valued.

The comments from the venture capitalists are all rather well known – nothing really unexpected was expressed. If you are a start-up, getting funded should never be considered an easy task. Ann Winblad from Hummer-Winblad venture partners noted that, in the end, “building a start-up is about assumptions, which is also why it’s called venture capital. As the start-up unfolds its execution plan these assumptions will be tested against the market, revealing whether the assumption was right or not”. On top of that, some concluding advise from the panelists to the entrepreneurs was to “unwrap” your ideas and get feedback from relevant people. Too often entrepreneurs are afraid of having ideas stolen – which rarely happens – resulting in good ideas being lost because experienced executives could not provide feedback.

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