The venture capital industry, while not by any measure dormant, has over recent years certainly been a lot more circumspect about the deals it funds. It has also been more risk averse and conservative. But perhaps this is now changing according to the MoneyTree Report, which is based on data provided by Thomson Reuters (News - Alert) and produced by PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA), venture capitalists look to be slowly but definitely getting back in full swing, especially with tech investments - at least if Q3 2013 numbers stand for anything longer term.
1,005 deals were closed in the quarter, totaling $7.8 billion. That represents a 12 percent rise in funding activity over the $7 billion invested in Q2 2013, and a five percent increase in total deals from 956 over the same period.
Total dollars invested and total deals funded for the Q1 - Q3 2013 period have exceeded dollars invested in the same period in 2012. That said the dollar and deal totals for the first three quarters of 2011 exceeded those of 2013. Perhaps this implies more of a stable environment than has been the case dating back to 2008.
We ourselves are more directly interested in how well the tech and software industry is doing, and the news here is very good indeed. The software industry received its highest level of funding in Q3 2013 than it has in 12 long years in exceeding the $3 billion mark for the first time in those 12 years - with $3.6 billion in total funding for the quarter. The software industry also toted up the most deals for the period at 420 - a large 23 percent increase from the 342 rounds of funding completed in the previous quarter. Furthermore, nine of the 11 largest investments in Q3 2013 went into software companies.
The Biotechnology industry was a distant second to software, with $852 million going into 123 deals, falling 39 percent in dollars but rising 10 percent in deals from the prior quarter. Medical devices received the third largest investment total in Q3 with $566 million going into 65 deals, which represented a 12 percent increase in dollars but an 8 percent decline in deals.
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Venture capitalists invested $1.5 billion into 252 Internet-specific companies during the third quarter of 2013. This investment level is 19 percent lower in dollars and 9 percent lower in deals than the second quarter of 2013 when $1.9 billion went into 277 deals. Only one of the largest 11 rounds for the quarter was in the Internet-specific category. ‘Internet-Specific’ is a discrete classification assigned to a company with a business model that is fundamentally dependent on the Internet, regardless of the company’s primary industry category.
Companies in the software industry also captured nearly half of first-time investments (companies receiving venture capital for the first time) in the third quarter, accounting for 49 percent of the dollars and 47 percent of the companies receiving funding in Q3 with $627 million going into 163 companies. The Life Sciences sector (medical devices and biotech combined), however, dropped 56 percent in dollars from the prior quarter to $150 million, while the number of companies receiving funding for the first time rose 31 percent to 47. Through the first three quarters of 2013, only 104 Life Sciences companies received venture capital for the first time, the lowest number for the first three quarters of any year since 1996.
Mark McCaffrey, global technology partner and software leader at PwC U.S., makes it clear that “it’s an exciting time to be an entrepreneur with a software company. More venture capital dollars are going into more software deals than we’ve seen in the past decade. The continued increase in valuations for innovative and disruptive technologies in software-related companies, coupled with the increase in exit activity, is driving venture capitalists to make more investments in this space. And, at the current pace of investing, we should see total venture capital investments in 2013 exceed the annual total from 2012.”
John Taylor, head of research at the NVCA, adds, “With more than half of this quarter’s deals coming from early and seed stage deals, there’s credible reason to be optimistic about the future of innovation and the vibrancy of the startup ecosystem. Software is a natural increased area of focus given that many tech deals are less capital intensive to get to proof of concept."
Taylor also says, "We are balancing our optimism, however, against the recognition that VCs are still trying to gain exits for the previous generation of companies. There is some improvement on that front but we would like to see it strengthen even further."
All in all, it is good news for software tech. The full MoneyTree Report results are available online.