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7 February 2014

Investment: Venture Capital landscape shifting

Influx of angel, crowdsourcing platforms and the growth of corporate venture capital has shifted the landscape.

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Moderator Peter Delevett (far left) was joined by (left to right) Sue Siegel, Corporate Officer, GE CEO, healthymagination; Ray Rothrock, Partner, Venrock Chair, National Venture Capital Association; and Chris DiGiorgio, Executive Research Fellow (Emeritus), Accenture. (Lauren Goode/Peninsula Press)

By Lauren Ottinger and Yu Zhai

SANTA CLARA, Calif. — The nature of the Venture Capital industry is undergoing a fundamental shift, according to a panel of venture capitalists who spoke at Joint Venture Silicon Valley’s State of the Valley conference on Friday.

Chris DiGiorgio, Executive Research Fellow (Emeritus) at Accenture said that, “Venture Capital is at an inflection point in its 50 year history.”

The panel pointed to multiple factors that are forcing changes in the way venture firms are investing and on what scale. An influx of angel, crowdsourcing platforms and the growth of corporate venture capital has shifted the landscape to a new “innovation sector,” they said.

Meanwhile, new money being invested into VC firms this year has leveled off at about $20 billion annually. What’s more, said DiGiorgio: “liquidity is changing.”

“The news is that there are more IPOs occurring each year, but the value of those exits are significantly lower. It is more difficult to IPO than it was 10 years ago and takes significantly longer to get to that point,” he said.

With IPOs being so challenging companies are staying smaller or being acquired, slowing job creation, he said.

According to the 2014 Silicon Valley Index:

  • Silicon Valley and San Francisco’s share of total California venture capital investment shot up from 70 percent in 2012 to 77 percent in 2013, based on data from the first three quarters of 2013. The region’s share of U.S. investment also increased, from 37 percent in 2012 to nearly 39 percent in 2013.
  • Software continued strong, accounting for 44 percent of total venture investment, up from 38 percent in 2012. The biotechnology sector also grew to 11 percent in the same period of 2013 up from 8 percent in 2012.
  • Clean technology, a sector where investment has been steadily declining since the flood of funding in 2008 has started to grow again and is on track to exceed 2012 investment, with $840 million in the first three quarters alone.
  • The clean tech space has shifted away from solar investments that saw a 74 percent decline in 2013 year- over-year to energy efficiency, biofuels & biochemicals, fuel cells & hydrogen, the smart grid, and transportation.

While venture investing in Silicon Valley has increased both as a percentage of VC investment in California and the nation as well as in actual dollars – up $12 billion this year – the composition of early stage investment has shifted significantly over the past three years.

The report noted an increase in later-stage, Series A+ investment in Silicon Valley from $460 million in 2011 to $726 million in 2012, and $1028 million in just the first three quarters of 2013.

By contrast, San Francisco has shown continual growth in seed stage investment from $96 million in 2011 to more than $164 million in 2013, while showing a decline in Series A+ investment from $921 million in 2012 to $507 million in 2013.”

Discussing these trends, the panel pointed to three challenges facing the VC industry: the pressure faced by limited partners who need returns on their investment; a longer frame from initial funding to IPO and the lower valuation of these exits; finally, the influx of money coming from angel investors and other sources that may be replacing venture capital.

Venture Capital by industry.  Click image to enlarge.(Image courtesy of Joint Venture Silicon Valley)

Venture Capital by industry. Click image to enlarge. (Image courtesy of Joint Venture Silicon Valley)

The entry of angel investors and crowdsourcing platforms make “getting that initial funding easier than getting to the later rounds where growth is harder and more important,” DiGiorgio said.

These days there are are many more opportunities to have your idea funded from corporate or institutional VCs, angels, or crowdsourcing platforms, he explained. Moving to later stages is then much more difficult.

In response to questions about crowdfunding, Ray Rothrock, a Partner at Venrock and Chair of the National Venture Capital Association (NVCA), cautioned: “Be careful of crowdfunding, you have to be prepared to lose all your money.”

Crowdfunding, he said, is not really built to last a long time. “If you are going to build a big company, it takes lots of money and you aren’t going to do $16 billion [like Facebook] with crowdfunding.”

Rothrock said the NVCA recognizes the shifting venture landscape and has developed an agenda to help keep innovation and entrepreneurship “cool” and successful. That agenda focuses on immigration and R&D.

“Immigration is very high on the NVCA agenda,” Rothrock said. “It is really important. Forty percent of Venrock’s portfolio companies had CEOs who are foreign nationals.”

R&D also needs attention, he said.

“If we don’t fix our R&D and allow people to come here and work on it, we will be in trouble,” he said.

Regarding R&D DiGiorgio added: “One of the changes we’ve seen, is that corporate companies that have had labs over the last decade have reduced or even closed them and are looking for a new model of idea generation by seeding money to many different ideas and then using those as if it is their own R&D, reducing corporate labs and increasing corporate venture.”

Sue Siegel, Corporate Officer at General Electric Corp. and Chief Executive Officer of GE Ventures, agreed with DiGiorgio’s assessment.

“The corporate R&D spend is pretty much steady but the allocation is different,” she said. “Twenty-nine of the Fortune 30 are here in Silicon Valley, establishing VC arms and laboratories.”