The State of Venture Capital

With summer and labor day fading into memory, let’s get back to business.  While it’s still early to draw conclusions from Q3 data, as of late August, venture capitalists had already invested $2.44 billion into 263 companies (data from Thomson Reuters).  With a month still left in the quarter, this portends a large increase in overall funding compared to the $2.56 billion invested in Q3 last year, accompanied by a likely small rise in the number of companies funded.  Of particular interest is the increase in average deal size (over $2M) so far in Q3, which runs contrary to the seed-stage and Super Angel boom that has dominated most recent industry discussion.

Academics Josh Lerner and Steven Kaplan — two of the foremost experts on VC — might agree that the rallying cry of “venture is broken” is overstated.  They recently published a paper (link is pdf) that looked at venture funding as a percentage of stock market value, as well as historical industry returns (including the premium post-2000 vintages). Their conclusion is that venture capital is not a broken industry, but merely exhibiting “the natural evolution of a relatively competitive market” — which is about a close to a full-blown raspberry as they are likely to get.

Another study (pdf, again) looks at the human side of companies who have received funding by examining the 185 seed and Series A internet deals in the first half of 2010. While the data on ethnicity provoked the most blogger controversy, more interesting is the contrarian findings on age: the average founding team was 35-44, with another 20% of teams average 45 and over.  The whiz kids — 18-25 year olds — represented just 4% of companies receiving investments.

Lastly, the WSJ notes that there is a ticking-time bomb in many VC portfolios — agreements with their Limited Partners to dispose of all investments within a decade, which for many funds is coming due.  The WSJ calculates over 3,900 companies who received investments seven or more years ago. While this decade deadline can be extended, it does not run forever (especially if a VC continues to pull down management fees), which portends an eventual gush of attempted exits. M&A bankers, start your engines…