While promising startups benefited from an increase in backing from ‘business angels’ in 2012, global venture capital investment fell back during the year.
Following two previous years of sustained growth, 2012 marked a turning point in the venture capital world, with an overall decline in investment. A report published by business consulting group Ernst & Young, entitled ‘Turning the corner: Global venture capital insights and trends 2013’, which examines the changes in investment in 2012, points to a decline both in the number of deals closed and the sums invested, which hit their lowest point since 2009. This global trend affected the beating heart of innovation in the United States as well as the Europe and Asia markets. Nevertheless, the decline in investment on the part of venture capitalists was to some degree offset by the rise of crowdfunding and increased capital injections from business angels.
A global trend
Global venture capital investment totaled $41.5 billion in 2012, representing a drop of 20% on 2011. The average size of fund-raising ‘rounds’ recorded also fell from $9.6 million in 2011 to $8.4 million last year. This trend was observed in all sectors and all fields of innovation. The most dynamic ecosystems in terms of funds raised were Silicon Valley, New England, Southern California, New York, and the United Kingdom, hotly pursued by Beijing, Germany, Israel and France. Europe and the United States remain in the lead however in terms of the number of financing deals and funding rounds closed.
New investment strategies
The Ernst & Young report shows that the overall decline in venture funding has been matched by a change in approach to investing by major players. Venture capital funds are now showing themselves more cautious and risk-averse, preferring to invest in companies that are already generating revenues and less inclined to take a bet on less mature startups. This naturally translates into lower levels of investment at the product development stage – falling from 32% of all deals to 17% between 2006 and 2012 – and an increase in the number of financing deals closed at later stages of development – rising from 56% of the total in pre-crisis 2006 to 69% of all deals closed (74% in value terms) in 2012. In spite of these rather unpromising figures, the report’s authors believe nevertheless that 2013 as a whole will “see the venture capital industry turn the corner. Steadying economic conditions will bolster investor confidence and point towards a strengthening risk appetite,” predict the E&Y experts.