Venture Capital Outlook 2013 (Part 1 of 3: Recap of 2012)

Are you a business owner looking for investment dollars in 2013 to help you grow your business? Or an investor trying to decide whether and where to invest your money this year? If you answered “yes” to either question, then you’re undoubtedly asking yourself one big question:  WILL 2013 BE A GOOD YEAR TO FIND OR INVEST MONEY?

Of course, nobody knows for sure, but we can try our best to make some predictions based on 2012 trends and some interesting surveys and statistics released by the National Venture Capital Association (NVCA), Cambridge Associates,, and Thomson Reuters.  Key among those is the recent survey of CEOs and venture capitalists taken jointly by NVCA and Cambridge Associates, which you can view here >>.

Recap of 2012.

So, let’s start with where things left off in 2012.  Among the many statistics being discussed and circulated, consider the following:

1.  Funds Turning a Corner

The typical venture fund generated a positive internal rate of return (IRR) of 5.3% in 2012.  That number is not very impressive, compared to the eye-popping 83.4% IRR for the 10 years ending in 1999; but it sure beats 2010, when IRR was -5.2% (that’s a NEGATIVE 5.2%, in case you missed it).  And almost half of surveyed VCs predict that returns will continue to improve in 2013.  Seems that VC funds may be slowly turning a corner.

2.  Seed Success is Critical. 

Wealthy individual investors, often referred to as “angel” investors, have been throwing seed capital at early stage, start-up companies in record amounts.  On the other hand, by stark contrast, Series A funding is way down.  One consequence: if an early stage company can’t catapult itself into profitability using seed capital from an angel investor, it’s not likely to survive long enough to get a first round of preferred funding.

3.   Doing More With Less

Start-up costs have continued to drop, in large part because of technological advances.  As a result, start-ups today seek on average only $100,000 of initial funding, rather than $1-3 million in earlier periods (see survey).  Here’s the point: more start-up companies are able to do more with less.

4.  Less Buying & Selling. 

The number of venture-backed companies sold in 2012 dropped almost 20%, compared to 2011 (which was not exactly a strong year)  (see Thomson Reuters survey).  Put another way, 2012 witnessed a downturn in M&A involving venture-backed companies, which does nothing to encourage an increase in future VC investments.

So here’s my summary of 2012 in a nutshell:

A slowly improving environment for venture funds; companies more reliant than ever on seed-stage funding, and less likely than in recent past years to get that once-vital Series A funding; and fewer sales of venture-backed companies putting a damper on investors’ desire to sink good money in speculative businesses.  To summarize in a phrase: nothing to get excited about but maybe the beginnings of a turn-around (See: better IRR for VC funds, more angel investing, and companies doing more with less).

Lookout for my next blogpost, where I’ll review some key predictions for 2013 made by people who are really in-the-know:  venture capitalists and CEOs of investment-ready companies.

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