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The U.S. venture capital industry is undergoing some dramatic changes. There are fewer venture capital firms, and those firms have fewer people. But the firms left standing are strong, well capitalized and looking for good deals, according to Mark Heesen, president of the National Venture Capital Association.
Heesen spoke Thursday at the annual Venture Community Joint Luncheon, hosted by MountainWest Capital Network, Utah Technology Council, the Utah Valley Entrepreneurial Forum and the Wayne Brown Institute.
Heesen said the number of venture capital firms was cut in half from 2000 to 2012, leaving a total of 522 firms in the United States. “But the amount of capital under management has not declined that dramatically,” he said, noting that these firms collectively have $199 billion under management, down just slightly from $224 billion in 2000.
Venture capitalists are not having a particularly difficult time raising new money, either. Over the past five years, the industry as a whole has been raising $15 – $20 billion a year.
Heesen said “the haves”—those who have been able to raise funds, think this is a strong number. “Of course the have-nots would like to see that number go up,” he said. “But the haves would say when you have about $15 - $20 billion raised a year, that’s the ideal size because you don’t have as many ‘me-too’ companies being funded.”
Venture capital firms have been investing about $30 billion each year over the past five years, said Heesen. But he reiterated that they’ve only been raising $20 billion—creating a huge gap.
“There’s going to come a time, and it’s coming soon, when we’re not going to be able to invest as much money,” he said. “We have been sitting on money for a number of years; we’re putting that money out, but that well is getting dry, and so we’re going to have to be out there raising serious dollars in the not-too-distant future if we want to see this move forward.”
Heesen said venture capitalists are becoming interested in early stage deals again “as they see the exit margins get better.” As firms’ portfolios mature and companies exit, venture firms are seeking earlier-stage replacements. Right now, about 52 percent of deals are early or seed-stage investments—the highest amount since 1985, according to Heesen.
But seed-stage investments aren’t ideal, as these companies have a high likelihood of going under. Heesen said venture capital investors would rather let those companies sink or swim on their own, and then invest in the survivors.
“From a venture perspective, it’s great to have other folks, basically, clear the field—whether that’s family, that’s your own money, or friends,” said Heesen. “From a purely selfish perspective, I’d rather see that. I’d rather see a $200 million fund looking at Series A deals than four seed funds all looking at little companies that may not make it.”
In Utah, the venture capital industry seems quite healthy when compared to the rest of the country, he said.
“Utah has seen much better growth over the short term than many other states,” Heesen said. “Particularly over the last three years, you’ve seen very strong growth in both the number of deals and the amount of money coming into the state.”
Last year, Utah saw 44 deals representing a total of $318 million, up significantly from a low of 27 deals and $151 million invested in 2010. It was the strongest year since 2000—the peak of the tech bubble.
“It’s very difficult in most regions of the country, but here there’s actually been a healthy number of first-time funds being raised in the state. That’s very good news from a long-term perspective for the state of Utah,” said Heesen.
Another unique situation for Utah is the high concentration of venture investments in software companies. In fact, software companies received 73 percent of investment dollars from the first quarter of 2012 through the second quarter of 2013. Media and IT companies together represented another 15 percent of the investments, while there was very little invested in life science companies.
Most states have a more diverse investment picture, said Heesen.
“There are two ways of looking at this,” he said. “One is you’ve found an expertise and that is an area you ought to stick with. The other one is that if this area starts to sink, you’re in trouble.”