The National Venture Capital Association (NVCA) held its annual breakfast in Washington DC yesterday. As part of the breakfast, Mark Heesen, President of the NVCA, provided some interesting thoughts regarding the state of the VC industry, which are summarized courtesy of Matt Gorra and Matt VanderGoot, corporate and securities attorneys in attendance at the breakfast:
- The number of VC firms continues to contract; however, the majority of those that have fallen by the wayside the past few years are those with small fund sizes ($5-$25M). There are still plenty of quality VC’s with sufficient financial backing to fund quality technologies.
- Over the past few years, VC fundraising has evolved from (i) LP’s not taking phone calls, to (ii) LP’s accepting phone calls, to (iii) LP’s now scheduling meetings to discuss potential investments in VC funds. The difference now is that LP’s will not invest in as many funds (e.g., 10 fund investments in the good old days, now reduced to 5 fund investments). NVCA is concerned about a future retreat by some pension funds from VC investing, which may lead to a funding gap.
- Investments by VC firms is on an approx $6B per quarter pace, which can be described as steady and a vast improvement over a couple of years back, but not as high as we all would like it to be.
- VC’s continue to be primarily interested in cleantech, social media, and IT (especially healthcare IT). Life science deals are finding it more difficult to find VC funding; the FDA needs to ease the approval process to help biotech startups get to market more quickly.
- So-called “corporate VC’s” (VC arms of corporations) continue to spring up and are becoming more accepted as alternatives for capital. Many have developed sophisticated investment teams and can prove to be viable partners.
- The IPO market has started to show signs of recovery. There have been 30 VC-funded U.S. IPO’s to date in 2011; 1/3 of those are companies based outside the US. Troubling, though, is that the average time to get to IPO has increased to almost 10 yrs – need to pressure legislators to make it easier for companies to get to IPO (reduced SEC disclosure requirements for smaller companies, etc.)
- NVCA believes there probably isn’t an immediate threat of proposed changes to carried interest tax rules that would tax all or a portion of a GP’s carried interest as ordinary income instead of capital gains.
- In the current political/economic environment, we may see a decrease in government contract funding – companies should watch legislation carefully and try to position themselves where the money will continue to flow.
This seems consistent with what I’m seeing lately. For example, Heesen’s editorial comment regarding the FDA was echoed by panelists at the 2011 Washington State Biomedical Device Summit, which I attended at the University of Washington’s Bothell campus on Tuesday. I’m also seeing a lot of companies work on raising their own VC funds, which appears to be increasingly popular ever since Google formed its own VC fund.