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2012 Venture Outlook: Some Bright Spots and Some Gloom

Xconomy National — 

It’s that outlook time of year, and Mark Heesen, president of the National Venture Capital Association (NVCA), was in San Diego earlier this week, talking about the 2012 outlook for venture capital. Today he’ll make a similar presentation to the New Jersey Technology Council. Next week,  John Taylor, the NVCA’s director of research is set to talk in Florida about the 2012 outlook.

Heesen began his presentation in San Diego by saying, “Be prepared for a roller coaster ride here, because that’s where we’ve been for the past year—and that’s where we’re going.”

In a conversation with Xconomy yesterday, Heesen talked about some of the broader trends he’s charting throughout the United States. Here are some of the takeaways from our talk, and from Heesen’s presentation in San Diego:

—The VC industry continues to contract. Venture capital investments in U.S. startups peaked in 2000, when VCs sank $99 billion into emerging companies of all kinds. There were 1,022 venture capital firms at that time, and they were collectively managing $220 billion worth of invested capital. In 2010, VCs invested more than $20 billion into startups of all kinds. The number of VCs had plunged by almost 55 percent—to 462 VC firms with $177 million under management.

—VCs are raising more capital from their limited partners, but it isn’t enough to sustain current investment levels. In 2011, U.S. venture firms raised a total of $18 billion. That was up significantly from the $14 billion that VCs raised in 2010—but it falls $10 billion short of covering the $28 billion that VC firms invested in 2011. As a result, Heesen says he expects venture investments in U.S. technology and life sciences companies to decline in 2012.

—A handful of VC firms accounted for a disproportionate amount of the $18 billion raised from limited partners last year. Heesen interprets this as another indication of industry contraction, and predicts VC firms will continue to shed partners, stop making new investments, or close their doors altogether.

—Corporate venture capital is increasing. Many big U.S. companies are seeking guidance from the NVCA in establishing corporate venture funds. “If there is one area where you’re seeing a lot of activity, it is in corporate venture capital,” Heesen says. While most people know that Intel operates the largest corporate venture fund in the U.S., Heesen says few people realize that Qualcomm’s is the second-biggest.

—Cleantech has become a major category for venture funding over the past decade, increasing from a total of $300 million—or less than 1 percent of all venture capital investments in 2001—to $4.3 billion—or 15 percent of the total invested in 2011.

—The drop in first-funding deals in life sciences startups is alarming. First-funding deals (typically Series A round) in life sciences companies dropped to 153 deals in 2011—a nearly 43 percent decline from the 268 first funding deals in 2006. “We’re hearing a lot of concern from VCs about the FDA time-to-market approval,” Heesen says. “And we’re hearing a lot from the limited partners about length of time it takes for them to see a return on their investment.”

—IPOs remain well below what’s needed for capital turnover, Heesen says. In 2011, 52 venture-backed IPOs raised almost $9.9 billion. IPO activity hit a wall in mid-August, suffering from the combined effects of the Congressional deadlock over the federal budget, Europe’s economic woes, and worries over the political revolution in Libya. At the end of 2011, 60 U.S. companies were in registration and waiting to go public.

—The IPO bottleneck has led to a record number of acquisitions over the past two years, with 429 M&As in 2011 and 436 in 2010.

—Heeseen says he expects venture capital deals are continuing to cluster along the East and West coasts, with a hole expanding in the Central U.S., where it is becoming increasingly difficult for technology and life sciences startups to attract VC investors. California, especially Northern California, will continue to attract the biggest chunk of venture money, he predicts.

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