Drop in Venture Capital Means More Competition for Start-Ups Seeking Funding

Drop in Venture Capital Means More Competition for Start-Ups Seeking Funding

VC investments declined for the first time in three years, according to a recent MoneyTree Report by PricewaterhouseCoopers LLP and the National Venture Capital Association (NVCA).

Overall, venture capitalists invested $26.5 billion in 3,698 deals in 2012, a decrease of 10 percent in dollars and 6 percent in deals over the previous year. The clean technology and life sciences sectors experienced the greatest drop off. Meanwhile, the software sector remained strong in 2012, with venture funding increasing 10 percent to $8.3 billion and deals up 8 percent.

According to the report, the stage of investment also shifted from seed to early stage in 2012. Investments into seed stage companies decreased 31 percent in terms of dollars and 38 percent in deals with $725 million going into 274 companies in 2012, the lowest annual seed dollars since 2003. The trend reveals that VC firms have started engaging with companies later in their life cycle than in previous years.

The report suggests that VC firms have become more discriminating when it comes to their investments. Given the uncertain economic times, they want to make certain that the risk will pay off. Therefore, it is even more important that companies put their best foot forward in written presentations and meetings.

In light of this, entrepreneurs are becoming more reliant on other funding sources, including: friends and family rounds of financing, debt financing, sweat equity, and using equity to purchase equipment, rent space, and hire consultants. Too many entrepreneurs make the mistake of valuing their billion-dollar ideas at such unrealistically high initial valuations that it makes it difficult to interest sophisticated investors and consultants.

For more information about what venture capital firms look for in a business opportunity, please see our prior post.

If you have any questions about venture capital financing or would like to discuss how it may benefit your business, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work.