The Pitch Book 4Q 2012 Venture Capital Rundown

VC Overview

VC investors completed 685 investments in U.S.-based companies totaling $6.1 billion in 3Q 2012, dramatic drops from the levels achieved in 2Q 2012. The drop-off in dealmaking was not confined to a particular stage of the
investment cycle, as angel/seed, early, and late stage deal volume all fell by approximately one-third. It’s important to put this decline into context, as VC investment year-todate is still even with 2011.
The second quarter of 2012 registered the most VC financings of all-time for a single quarter, so a pullback should not be too alarming. Furthermore, activity had increased 30% from 4Q 2011 to 2Q 2012, which has led some to speculate that VCs took advantage of the summer months to recharge before a push at the end of the year.
VC deal flow has been on a general upward trajectory since the beginning of 2011, but the total amount of money invested through VC deals has been trending downward since 1Q 2011.
A contributing factor has been that angel and seed stage deals have grown from 17% of financings in 3Q 2011 to 23% in 3Q 2012, while the typically larger late stage financings have contracted from 36% to 31% during the same period.
On a yearly basis, it will be difficult for 2012 to surpass the record-breaking numbers posted in 2011. Still, deal-making has been strong despite the disappointing 3Q figures, and 2012 could still prove to be the second-best year for VC investments by both deal count and capital invested.

Industry Rundown

It should come no surprise that the IT industry accounted for the majority of VC investment during 3Q 2012, representing 50% of deal flow and 48% of the capital invested. The proportion of VC money flowing into the IT industry has steadily been rising since dipping to 33% in 2Q 2011 and now sits at its highest level since 3Q 2006.
One of the most significant trends in VC investing has been the increasing prevalence of deals being executed in the B2C space, particularly in the earlier stages. Since 1Q 2009, B2C has expanded from 14% of VC financings to 20% in 3Q 2012. Over the same period, B2C grew from 10% to 16% of capital invested. For the first time ever, B2C now accounts for a higher proportion of VC deals (20% through the first three quarters of the year) than the Healthcare industry (17%). However, Healthcare companies continue to attract significantly more
dollars as the bulk of the industry’s financings come in the later stages.
Renewable energy and clean tech are commonly thought of as a prime spaces for VC investment, but the data tell a different story. Investors closed just 16 Energy deals totaling $298 million in 3Q 2012, representing a measly 2% of deal flow and 5% of capital invested.

VC exits

At first blush, the quarterly exit numbers seem abysmal with a 75% drop-off in capital exited from 2Q to 3Q. However, the quarterly comparisons for exit activity are a bit muddled due to the $16 billion Facebook IPO in 2Q. With that deal removed, the decline in capital exited is a much more tolerable 8%. Still, exit volume did fall substantially from 113 deals in 2Q 2012 to 96 in 3Q. The outlook is much better when looking at the data on a yearly basis; 2012 has already broken the record for most capital exited with $35.5 billion and the  final exit count should be on par with the two preceding years. Corporate acquisitions continue to be the exit method of choice for VC companies, but the exit strategy has fallen to 72% of activity, the lowest level since 2Q 2007. IPO activity declined slightly in 3Q, but 2012 has already seen 36 VC-backed IPOs, which is the highest total for the first three quarters of a year since 2000.

Private equity firms have increasingly been turning to the VC space to source deals and set a new record (42) for VC-backed company buyouts in the first three quarters of 2012.
While VC investment activity is driven by IT, the industry plays an even larger role when it comes to exits. IT companies have accounted for 57% of exit volume and 78% of the capital exited through the first three quarters of the year.



Preqin’s Deal Flow Data: Venture Capital Deals Activity Edges Up in Q2 2012

Number and value of VC deals increase by 16% against Q1 2012 figures.

Preqin’s deal flow data shows that there were 1,249 venture capital financings announced during Q2 2012, representing an aggregate value of $10.9bn. This is a 16% increase in both the number and value of VC deals in comparison to Q1 2012, and is the largest amount of aggregate capital committed by VC firms since Q3 2011.

Other Key Facts:

  •  67% of the number and 75% of the aggregate capital of VC deals announced in Q2 2012 occurred in North America, with 839 VC financings in the region valued at $8.2bn during the quarter. This is a 14% increase in comparison to the previous quarter, when 734 VC financings valued at $7.2bn were announced.
  • European VC activity experienced a 23% rise in the number and a 25% increase in the value of VC deals in comparison to the previous quarter. A total of 252 European deals took place during Q2 2012, valued at $1.4bn.
  • The number of Chinese VC deals continued its slide in Q2 2012, with 27 VC deals announced in the country during Q2 2012. This represents a 20% drop from Q1 2011 levels and a 42% decrease from Q4 2011, largely due to investor worries regarding the Chinese exit market.
  • However, while the number of VC deals in China dipped in Q2 2012, deal value almost doubled in comparison to the previous quarter, with $545mn invested in the region. This is up from $280mn in Q1 2011, but still lower than the $798mn worth of VC deals completed in Q4 2011, and is in large part due to the $216mn Series C financing of Xiaomi.
  • 75 VC deals were announced in India during Q2 2012, a 32% increase from the previous quarter, representing the most active quarter for Indian deal flow during the 2010 – H1 2012 period in terms of number of deals.
  • 17 VC deals were reported in Israel during the period, matching activity in the region witnessed in recent quarters, representing an aggregate value of $200mn.
  • A third of all deals globally during Q2 2012 were Angel, Seed or Series A deals, displaying investors’ attraction towards very early stage investments. Additionally, Series B, C, D and later investments accounted for less than 20% of the number of all deals.
  • Venture capital-backed add-on deals made up 7% of all VC transactions in Q2 2012.
  • The average VC deal value in 2012 YTD has been $14.1mn per deal. This is down on 2011, when the average VC investment totalled $17.9mn per round, but very similar to deal values witnessed during 2010. In Q2 2012, more than a quarter of the total number and aggregate value of financings globally was invested in the internet sector, which includes social networking and e-commerce deals.
  • The healthcare and software sectors each accounted for around 16% of the total number of VC deals, while clean technology companies accounted for 13% of the aggregate value of investments.