Early Stage Deals, Cleantech Collapse Drive 2012 VC Trends

1/16/13Follow @curtwoodward

They were two of the major storylines in startup investing this past year: The collapse of cleantech and the march of venture capitalists into earlier stages.

Now, we’ve got some fresh numbers to help illustrate those trends.

A new report out today by CB Insights, a New York-based VC research firm, shows that venture investors made more deals in 2012—but the checks they wrote were smaller. It’s the first time since 2009 that the raw dollar figure for U.S. venture investment dropped from one year to the next, according to CB’s numbers.

As usual, the Internet sector was the biggest target of VC investment, followed by healthcare and mobile/telecom.

Despite a lot of public discussion about a glut of seed-stage deals in recent months and a likely “crunch” of startups seeking Series A deals, CB Insights doesn’t show any pinch happening as of the end of 2012—in fact, Series A deals ticked up in the fourth quarter.

Meanwhile, the competition for regional bragging rights in startup investing will get some additional fuel with CB’s latest findings: California activity dipped somewhat in the firm’s latest report, while Massachusetts, New York, and even Washington state saw some improvement.

CB Insights pegged the value of all VC investment in 2012 at $28.3 billion, compared with $30.6 billion in 2011. The number of deals, however, continued to grow with 3,267 venture investments tallied for 2012, compared with 3,051 a year ago.

That could be explained in part by the continued migration of venture investors down the line into earlier-stage deals where the dollar amounts are smaller, particularly as efficiency in software and IT continue to drive those costs down for startups.

But CB’s researchers also pointed to the drop-off in cleantech investing, which has been brewing for a while now. Simply put, 2012 saw fewer “mega-deals,” CB Insights said—and manufacturing-intensive cleantech had previously been a source of those big-money investments.

The trend also was reflected in the quarterly numbers. CB Insights reported 834 deals in the fourth quarter of 2012, compared with the 755 investments seen a year earlier. But the dollar figure dropped to $6.8 billion for the quarter, compared with the $7.6 billion invested in the fourth quarter of 2011.

Investments from the seed stage up to Series B rounds made up the lion’s share of deal volume in the fourth quarter, showing no signs just yet of a “Series A crunch.” Any weakness in that stage of investing will likely show up in the early quarters of 2013, CB said.

California is still the driving force of the venture scene, but it accounted for a somewhat smaller slice of the overall domestic VC pool in the fourth quarter, CB found. Golden State companies attracted 48 percent of VC investment in the quarter, compared with 52 percent a year earlier.

Massachusetts remained essentially flat in the second spot of this ranking, while New York grew, from 8 percent of VC dollars in the fourth quarter of 2011 to 10 percent in the final period of 2012.

Texas dropped from 6 percent of VC investment nationally to 3 percent, while Washington state grew from 2 percent to 4 percent.

New York also grew its share of the deal flow in the fourth quarter of 2012, from 10 percent of all deals to 12 percent. The rest of the top five states remained within one percentage point of their previous performance.

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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