August 20, 2014

How Venture Capital Deals Have Changed Since the Great Recession

Here’s a bit of bad news for entrepreneurs seeking to finance high potential startups. Venture capitalists are doing fewer deals and investing less money than they did before the financial crisis and the Great Recession. According to data from Price Waterhouse Coopers and the National Venture Capital Association, the number of venture capital deals shrank from 4,211 in 2007 to 3,698 in 2012.

The amount that venture capitalists put into companies is also down substantially. Measured in inflation-adjusted terms, in 2012 venture capitalists only invested 75 percent of the amount they did in 2007.

Deals are also smaller than they were before the Great Recession. In real dollar terms, the average deal size declined from $8.4 million in 2007 to $7.2 million in 2012.

For entrepreneurs looking for a first time investment, the numbers are also discouraging. In 2012, VC’s made 1,163 “first sequence” deals, down from 1,418 in 2007, a decline of 18 percent.

The amount invested dropped even more. In inflation-adjusted terms, VC’s put a whopping 52 percent less into first time deals in 2012 than in 2007.

venture capitalSource: Created from data from Price Waterhouse Coopers/National Venture Capital Association

The average deal also has been shrinking since the Great Recession, as the figure above shows. In inflation-adjusted terms, the average 2012 first investment was only 59 percent the size of the average 2007 initial investment.

The shrinkage in “first sequence” deals has occurred across all investment stages, with the decline in the inflation-adjusted amount invested heaviest in the seed and expansion stages. For number of deals, the decline was present for all stages, except for the early stage.

First sequence deals have become more focused at the early stage. In 2012, early stage deals accounting for 51 percent of all first sequence venture capital funding, up from 38 percent in 2007. The number of early stage deals increased from 42 to 65 percent of the total.

However, the shift in the investment stage wasn’t towards younger companies. Both in terms of the amount invested and the number of deals, the growth in early stage financing came at the expense of declines in both seed stage deals and expansion stage deals (the stages before and after the early stage.)

10 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

10 Reactions

  1. Scott, as always, some good information. However, I’m a bit shocked. I thought things were getting better. Is the lower Venture participation because of all the other funding opportunities, such as angel investors, and crowdfunding?

  2. Scott, I’m thoroughly enjoying these informative stats posts. Saves me from doing a lot of my own research. Thanks for sharing.

    Ti

  3. Scott,

    I am interested in who is now doing the expansion phase. It could be that I live in “live free or die” NH but I know a lot of good entrepreneurs of later stage companies that don’t want to give up control to an outside decision maker and/or be forced to sell their company in the next 3-5 years so they don’t find equity attractive. What are we doing to get that type of opportunity capital? Particularly given that there is less equity, this is a pressing question that we must answer in order to get our economy in gear. thanks

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>



Who influences you? Nominate for the 2014 Small Business Influencer Awards.