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The VC industry is broken. So now what?

Posted in Uncategorized, tagged , , , , , , , , on May 9, 2012| Leave a Comment »

Article from GigaOm.

“The investment team at the Kauffman Foundation believes the venture capital industry is broken and they — or rather investors in VC funds — are partially to blame. The report condemns venture firms for being too big, not delivering returns, and not adjusting to the times. But then it blames the situation on a misalignment of incentives: Namely, limited partners that invest in venture firms have done so in a way that encouraged VCs to raise huge funds at a time when huge funds weren’t really warranted. And now, for the Kauffman Foundation at least, the chickens have come home to roost. From the report:

The most significant misalignment occurs because LPs don’t pay VCs to do what they say they will — generate returns that exceed the public market. Instead, VCs typically are paid a 2 percent management fee on committed capital and a 20 percent profit-sharing structure (known as “2 and 20”). This pays VCs more for raising bigger funds, and in many cases allows them to lock in high levels of fee-based personal income even when the general partner fails to return investor capital.

A smaller VC industry is needed

The solutions to the problem — changing the compensation structure, investing in smaller funds where the partners have also committed at least 5 percent of their own capital, investing directly in startups or alongside funds at later stages, and taking more money out of the over-saturated VC market — are already happening. Look at the widespread trend of angels or smaller funds created by a few investors. Or look at the rise of hedge funds or Digital Sky Technologies’ investing directly in hot companies like Twitter or Facebook at crazy valuations.

It’s unclear if other LPs will take the advice issued in this report, but the trends around VC investment these days are fairly clear. There are plenty of firms willing to put small amounts in at an early stage, so they have the option to keep playing if the deal gets hot. And they are just as likely to drop firms quickly around the second (Series B) fundraiser if they aren’t shaping up into a Pinterest or a Spotify. This hit-driven style of investment is a symptom of too much money chasing a new type of startup, and it’s likely that venture investors will compete until much of the return is squeezed out of a hot deal. And that’s no good for limited partners either.

The Kauffman report lists the ways it has decided to solve the mismatch between LPs and venture firms, and it goes into a lot of depth on how to improve the industry overall. But if one agrees with the assessment and solutions offered in the report, it also will result in some serious questions about the startup economy. The venture industry invested $28.4 billion into 3,673 deals in 2011, according to the NVCA and the PWC MoneyTree report. About 50 percent of their total investments were in seed and early-stage companies.

Does less venture money mean fewer startups?

Following the Kauffman Foundation’s suggestions means the pool will shrink. In many ways this is a good thing, as there will be less money chasing the few standout deals, but it also opens the door to thinking about building companies in a connected era. Angels are already picking up some of the VC slack and will likely continue to do so. Once Facebook goes public, I expect we will see a host of newly minted millionaires playing at being an angel or perhaps taking their riches and using it to build something new.

For those without soon-to-be-liquid options, Kickstarter and the gold rush promised by the JOBS Act are also likely to fill the gap. So it’s entirely possible the pool of venture capital will shrink while the pool of startups will remain about the same. In such a scenario, VCs, angels and then the rest of us play the role of investor. It’s a role millions already undertake, with Kickstarter’s seeing $200 million pledged and 22,000 projects funded since its founding.

And the passage of the JOBS Act means startups can now beg for money among the ranks of friends and family who aren’t accredited investors. I for one am leery of this development, believing it ripe for scams. The law also has the side effect of cloaking information about companies until right before they hit the public markets, which I think is the exact opposite of what a bill that encourages consumer investment ought to do. But still, there will be legitimate companies that will be able to start businesses thanks to the bill.

And as lawyers and entrepreneurs get comfortable with the law, new funding platforms should arise. So perhaps the Kauffman Foundation will find itself on the cusp of a trend, from the old-school style of fundraising where an entrepreneur has few choices and has to play by the VC industry’s rules to a crowdsourced and connected era of raising capital that mimics how the Web is changing a variety of businesses. Maybe the VC industry is like Motown. And it’s going to have to adjust to the new reality.”

Read more here.

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Valley clean energy innovation can prosper, it just takes awhile

Posted in Board Of Intellectual Capital, Business models, cleantech, Economy, Gerbsman Partners, Intellectual capital, Investments, Market research, Strategy, Technology, tagged , , , , , , , , , , , , , on March 12, 2012| Leave a Comment »

Article from GigaOm.

“Two Silicon Valley-backed Bay Area companies appear to be the tech vendors behind Apple’s new sizable and pioneering clean power push at its massive data center in North Carolina. Last week it was revealed that solar panel maker SunPower will provide Apple with panels for a 20 MW solar farm, while I reported earlier this month that fuel cell maker Bloom Energy looks to be the vendor behind Apple’s 5 MW fuel cell farm. The significance of Apple opting to partner with two Valley-born clean power firms illustrates that the greentech venture ecosystem can work — it just takes quite a long time.

San Jose, Calif.-based solar panel maker SunPower was founded way back in the mid-80′s by Stanford electrical engineering professor Richard Swanson, and received early funds from the Department of Energy, the Electric Power Research Institute, two venture capital firms and chip firm Cypress Semiconductor. The company went public in the Spring of 2005, bought venture-backed Berkeley, Calif.-based solar installer Powerlight in late 2006, and more recently was bought by oil giant Total.

Sunnyvale, Calif-based fuel cell maker Bloom Energy was founded a decade ago, though only came out of stealth two years ago, and was venture capital firm Kleiner Perkin’s first foray into greentech. Bloom also counts venture firm NEA as an investor, and Bloom raised its latest $150 million round of funding in late 2011.

Both companies have taken years to develop into firms that can mass produce their respective clean power technologies at scale and at a low enough cost to meet the needs of a large customer like Apple. And both companies have likely taken longer to mature than their investors had originally hoped. Kleiner Partner John Doerr said a couple years ago that he thought Bloom Energy would take nine years to go public (which, if true, would mean Bloom would have gone public last year). SunPower’s execs reportedly said back in the early(ish) days of the company that developing SunPower into a solar manufacturer took a lot longer than they anticipated.

But Apple apparently chose these two Bay Area clean power leaders for its first-of-its-kind, huge solar and clean power farms, suggesting these firms are delivering industry-leading products at the right economics for Apple. Apple is spending $1 billion on the data center, and likely between $70 million to $100 million on the solar farm. Each 100 kW Bloom fuel cell costs between $700,000 to $800,000 (before subsidies), so Apple’s fuel cell farm could cost around $35 million.

Yes, both SunPower and Bloom Energy, have had their fare share of struggles in recent years. 2011 was a particularly difficult year for SunPower, with a glut of solar panels causing prices to fall around 50 percent globally and Total’s CEO said recently that SunPower would have gone bankrupt last year without Total’s backing. Bloom Energy is a private company and doesn’t disclose its financials, but likely if Bloom was in shape to go public in 2011, it would have done so.

However, it’s no secret that greentech has been a particularly hard area for venture capitalists to invest in. The long time tables, the large capital needed, the hardcore science for the innovations, and the low cost focused energy markets, have created a difficult ecosystem for the traditional VC to make money off of. But after a long slog — which is still ongoing for SunPower and Bloom Energy in 2012 — these clean power technologies have actually broken into the mainstream. Valley, backed cleantech firms can make it — you’ve just got to sit back and wait.”

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Trends in Terms of Venture Financings in Silicon Valley — Fourth Quarter 2011

Posted in Uncategorized, tagged , , on February 28, 2012| Leave a Comment »

Article by Fenwick and West. For more information, please contact Barry Kramer and Michael Patrick (bkramer@fenwick.com).

“We analyzed the terms of venture financings for 117 companies headquartered in Silicon Valley that reported raising money in the fourth quarter of 2011.

Overview of Fenwick & West Results

  • Up rounds exceeded down rounds in 4Q11, 70% to 16%, with 14% of rounds flat. This showed continued strong valuations in the venture environment, consistent with 3Q11, and was the tenth quarter in a row in which up rounds exceeded down rounds.
  • The Fenwick & West Venture Capital BarometerTM showed an average price increase of 85% in 4Q11, an increase from 69% in 3Q11. Series B rounds were exceptionally strong, with an average increase of 164% since the last round.

Anecdotally, we attribute the Series B results in part to the increased number of smaller, relatively low valuation, Series A financings undertaken by micro VC firms. When the investee companies in these financings make good progress, it can result in a significant percentage increase in valuation in the Series B round – and if these companies do not make good progress, and do not raise a Series B financing, they will not appear in the Barometer statistics because there is no transaction to report, as described under “Methodology” below.

If Series B financings were excluded from the Barometer calculation (which we believe would be over compensating for this anomaly) the Barometer would have been 50%. Along these lines we note that Dow Jones VentureSource (“VentureSource”) reported that the three most prolific venture investors in 4Q11 were 500 Startups, SV Angel and First Round Capital, all early stage investors, with a combined 77 investments in 4Q11.

The results by industry are set forth below. In general, consistent with recent quarters, the internet/ digital media and software (which includes many of the “big data” and “cloud” companies) industries were the valuation leaders, and cleantech and life science lagged.

Overview of Third Party Data

In 2011 we saw a generally improving venture environment, with venture investment, fundraising, valuations, M&A and IPOs all up compared to 2010. But there were some anomalies:

  • Fundraising by venture funds was up in dollar terms, but the number of funds raising money declined.
  • Venture capitalists invested healthy amounts at healthy valuations, and showed gains in their portfolios, but venture capitalist confidence has been down three quarters in a row.
  • Some industries are concerned about a bubble (internet/digital media and software), while others are having a tough time (cleantech and life science).
  • Venture capitalists again raised significantly less money than was invested in venture-backed companies.
  • Although 2011 was strong, the fourth quarter showed some weakness with venture investment and M&A down in 4Q11 compared to 3Q11.
  • The number of venture funds is decreasing, while the number and importance of angel investors is increasing, and secondary market activity is expanding.

Venture Capital Investment. Highlights:

  • Venture investment was moderately lower in 4Q11 than 3Q11.
  • Venture investment was significantly higher in 2011 than 2010.
  • Average deal size increased in 2011.
  • Internet and software industries lead in 2011, although both saw declines in investment in 4Q11.
  • Silicon Valley received 41% of all U.S. venture investment in 2011, and 46% in 4Q11.

Data:

Venture capitalists (including corporation-affiliated venture groups) invested $7.4 billion in 803 deals in the U.S. in 4Q11, a 12% decrease in dollars from the $8.4 billion invested in 765 deals in 3Q11 (as reported in October 2011), according to VentureSource. For all of 2011 venture capitalists invested $32.6 billion in 3209 deals, a 25% increase in dollars from 2010, when $26.2 billion was invested in 2799 deals (as reported in January 2011).

The PwC/NVCA MoneyTreeTM Report based on data from Thomson Reuters (the “MoneyTree Report”) reported similar results. Venture investment in 4Q11 declined 6% in dollars compared to the 3Q11 results (as reported in October 2011), with investment of $6.6 billion in 844 deals in 4Q11, compared to $7.0 billion in 876 deals in 3Q11. For all of 2011 venture capitalists invested $28.4 billion in 3673 deals, a 30% increase from 2010 when $21.8 billion was invested in 3277 deals (as reported in January 2011).

The MoneyTree Report also noted that the internet and software industries saw the largest increase in investment in 2011, increasing 68% and 38% respectively over 2010, although both saw declines in investment from 3Q11 to 4Q11. Silicon Valley received 41% of all venture funding in 2011, followed by New England and New York at 11% and 9.5% respectively.

Merger and Acquisition Activity. Highlights:

  • M&A activity declined significantly in dollar terms in 4Q11 compared to 3Q11.
  • M&A activity increased significantly in dollar terms in 2011 compared to 2010.
  • Average deal size was up significantly in 2011, as the number of deals was flat to down.

Data:

Acquisitions (including buyouts) of U.S. venture-backed companies in 4Q11 totaled $9.4 billion in 107 transactions, compared to $13 billion in 122 transactions in 3Q11 (as reported in October 2011), a 28% decline in dollars, according to Dow Jones. For all of 2011, 477 venture-backed companies were acquired for $47.8 billion, compared to 468 acquisitions for $35.8 billion in 2010 (as reported in January 2011), an increase of 34% in dollar terms.
Thomson Reuters and the NVCA (“Thomson/NVCA”) reported 92 acquisitions in 4Q11 compared to 101 in 3Q11 (as reported in October 2011), and 429 in all of 2011, compared to 420 in 2010 (as reported in January 2011).

IPO Activity. Highlights:

  • IPOs increased in both 4Q11 and 2011 overall. o    63% of IPOs were in the IT industry. o    Groupon and Zynga accounted for 31% of IPO money raised in 2011. Data:

Dow Jones reported 10 U.S venture-backed company IPOs raising $2.4 billion in 4Q11, close to 5x higher in dollars from the 10 IPOs that raised $0.5 billion in 3Q11. In all of 2011, 45 venture-backed companies went public raising $5.4 billion, compared to 46 IPOs in 2010 raising $3.3 billion, a 64% increase in dollar terms.
Similarly Thomson/NVCA reported a 5x increase in IPO dollars raised from 3Q11 to 4Q11, and a 41% increase in dollars raised from 2010 to 2011. Thomson/NVCA also reported that approximately 63% of the companies going public in both 4Q11 and 2011 overall were IT companies, and that 75% of the companies going public in 2011 were based in the U.S., with 54% of the U.S. companies based in California.

To read the complete report, please visit Fenwick & West website here.

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Companies that would do best without venture capital

Posted in Business models, Economy, Intellectual capital, Investments, Market research, Strategy, tagged , , , on January 25, 2012| Leave a Comment »

By Dan Shapiro.

“I just got the following email.

Subject: Small taxi company looking to expand

Hello,

I run a small taxi company outside of Boston Massachusetts. My community has been targeted for casino development and I am looking to expand my business. Could you possibly provide some advice on how to find venture capital?

For someone who lives in the startup world, this looks pretty silly.  But I’m sure I’d say a lot of silly things if I were getting in to the taxi business, too.  So I figured I’d point him to a simple explanation of why taxi companies (actually, services companies in general) aren’t appropriate for VC.  I did the Google thing for a bit to find a good article.  And no luck.

Well, you know what they say: when the internet fails you, make more internet.  Here, then, are a very good set of reasons not to take venture capital (or – why venture capital won’t take you).

1.  You want to build a profitable company

First day of Founder’s Institute I ask how many people want to raise venture capital.  Most of the hands go up.  I then ask who wants to build a profitable company.  Again, most hands go up.

The funny thing about this is – VCs don’t actually like their companies to be profitable.  Someday, sure, but not on their watch.  You see, profitability means that the company wont grow any faster.

This seems odd, but think about this for a minute. At the early stages, a company may be making money, but it’s almost certainly investing every penny it makes back in to the business.  If it has access to outside capital (e.g. a VCs), it’s investing more than it makes.  And that’s exactly what VCs like: companies that can grow at amazing speed, and never slow down their burn rate to amass cash.

They like this for two reasons.  First, VCs want to invest in companies that can grow explosively.  That means huge markets, executives who can scale up a business fast, and a willingness on the part of management to double down on a winning bet – over, and over, and over again.  Second, because it means the company keeps coming back to the VC for more money on positive terms.  That means the VC keeps getting to buy more and more of the growing concern.

Of course, this is something of an over-broad generalization.  I’m required to include one per post or I lose my startup blogging license.  In fact many venture backed companies are profitable, it’s very impressive to bootstrap your company to profitability in a few months before raising outside investment, etc.   But if you are excited about a profitable business that can cut you giant dividend checks (not that most VCs can even accept divided checks  – long story), realize that VCs will not be pleased with that approach to running the business.  They will want you to plow those earnings back in to the business.  And when the day comes that a VC-backed business generates cash faster than it can effectively spend it?  They sell the company, or IPO (which is technically also selling the company), or replace the CEO with someone who can spend faster.

A taxi business should be run for profits.  That’s not VC style.

2. Your business has reasonable margins

As a general rule, VCs don’t like reasonable margins.  They are exclusively interested in outrageous margins.  Ludicrous margins.  We’re talking about sneering at 50%, and hoping for 80%, 90%, crazy astronomy stuff.  Venture capital is all about investing a little bit of money to create a business with massive scale and huge multiples – investing tens of millions to build software that then can be duplicated or served up for virtually nothing extra per-person with a total market size of billions.

In particular, VCs don’t like businesses that are people-powered.  Software businesses are awesome, but their evil twin – software consultancies – are near-pariah to VCs.  If adding revenue means adding bodies, they don’t like it.  In fact, enterprise software companies, which can tread a fine line between software consulting & software development, sometimes get really creative to come down on the right side of the line.

So the rule of thumb is that VCs like product companies: software, drugs, cleantech, and so on.  And they don’t like the manufacturing, service industry, and consulting businesses that often are just a tiny shift of business model away.

Every new taxi requires a… well, a new taxi.  And a new taxi driver.  Not the right business for VC.

3. You are going to double your investors’ money

I’ve covered this before, but VCs really don’t want to double their money.  Strange though it sounds, their economics make that look like a failure.  They need to target a 10x return on their investment, and that means – depending on stage and fund size – that you company has to grow to somewhere in the hundreds-of-millions to billions range to be interesting.

That means taking your taxi business from $20MM in annual revenue to $40MM just doesn’t do it for them.  Particularly because the valuation multiples on the aforementioned lower-margin businesses are smaller.

4. VCs probably don’t want to invest in you

Here are the people VCs really love to invest in:

  • Entrepreneurs who’ve already made them lots of money
  • Their closest buddies
Here are the people who VCs can be convinced to invest in:
  • People who have been wildly successful at high-profile past jobs that are related to their new business  (e.g. a former executive VP at a Fortune 500 company, inventor of thingamajig that everyone knows)
  • New graduates from top-of-the-top tier schools who have built something amazingly cool already
  • Extremely charismatic type-A personalities
Anyone else is possible, but our taxi driver is going to have a devil of a time.

5. You have better things to do with 9 months, and you will probably fail

That’s how long it took me to do my Series A for Ontela.  9 months before the first check came in.  Average is 6-12.  That’s because a busy VC will look at a few companies a day, and will make a few investments a year.  The math says the hit rate is well under 1%.  That matches my experience – I pitched over 100 times during our Series A investment.  Not only that, but most of the companies pitching the same events and people that I saw worked just as hard as I did, and did not get funded.  And fundraising is a near-full time job; you won’t have much time for actually driving your taxi.

6. You will have a new boss

You know the great thing about working for yourself?  Well, if you raise VC, you probably don’t have that thing any more.  Raising VC usually means forming a board that includes your investors, and that board is charged with, among other things, potentially firing and replacing you.  I’ve worked with a number of boards and have been lucky in that they were all awesome and I would recommend those folks to anybody.  But if you like your freedom, then bringing on VC may feel somewhat familiar – in an “I have a boss again” way you probably won’t enjoy.

What are my alternatives?

VC is really only appropriate for a tiny fraction of a fraction of the companies in the US.  But there are numerous alternatives.
  • Angel investors are individual investors who can invest larger amounts, on more flexible terms, and with less onerous restrictions.  Many companies that take VC money actually start with angel investments – but lots of companies never do VC, and just grow off of angel investment.
  • Traditional bank loans are always an option if you have a sufficiently traditional company – while they may not be right for many purposes, they’re definitely the best terms you will find for bringing in capital.
  • A Revenue Loan from a company like Lighter Capital is a way for companies with revenue to bring in capital with a debt structure – without giving up control to outside investors.
  • And, of course, Bootstrapping is arguably the best way of all – re-investing your company’s profits in your own growth, and building a strong company based on the revenues from your business.

…So does this mean I shouldn’t raise VC?

Look.  I’ve raised over $30mm from 7 different firms in the course of my two startups.  I will tell you: if you are the right kind of company, and find the right kind of investor, then VC is awesome.  It’s an instant infusion of cash, connections, experience, credibility, and confidence at the stroke of a pen.  It accelerates everything.  It focuses the mind.  I can’t recommend it highly enough.
But most companies are not the right kind of companies.  And the only thing more frustrating and time consuming than raising a VC round is failing to raise a VC round.
So think hard.  Make sure it’s for you.  And if not – keep on driving!”
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Trends in Terms of Venture Financings In Silicon Valley (Third Quarter 2011)

Posted in Board Of Intellectual Capital, Business models, Economy, Fenwick & West, Gerbsman Partners, Intellectual capital, Investments, IPO news, Market research, tagged , , , , , , , , , , , , on November 21, 2011| Leave a Comment »

Article from Fenwick & West LLP.

Background —We analyzed the terms of venture financings for 113 companies headquartered in Silicon Valley that reported raising money in the third quarter of 2011.

Overview of Fenwick & West Results

  • Up rounds exceeded down rounds in 3Q11 70% to 15%, with 15% of rounds flat.  This was an increase from 2Q11 when up rounds exceeded down rounds 61% to 25%, with 14% of rounds flat.  Series B rounds were exceptionally strong, comprising 38% of the relevant rounds (Series A rounds aren’t included as there is no prior round for comparison purposes), and 89% of the Series B rounds were up rounds.  This was the ninth quarter in a row in which up rounds exceeded down rounds.
  • The Fenwick & West Venture Capital Barometer™ showed an average price increase of 69% in 3Q11, a slight decrease from the 71% increase registered in 2Q11.  However, we note that one internet/digital media company had a 1,500% up round, and that if such round was excluded the Barometer would have been 54%.  This was also the ninth quarter in a row in which the Barometer was positive.
  • Interpretive Comment regarding the Barometer. When interpreting the Barometer results please bear in mind that the results reflect the average price increase of companies raising money this quarter compared to their prior round of financing, which was in general 12‑18 months prior.  Given that venture capitalists (and their investors) generally look for at least a 20% IRR to justify the risk that they are taking, and that by definition we are not taking into account those companies that were unable to raise a new financing (and that likely resulted in a loss to investors), a Barometer increase in the 30-40% range should be considered normal.
  • The results by industry are set forth below.  In general internet/digital media was the clear valuation leader, followed by software, cleantech and hardware, with life science continuing to lag.
Overview of Other Industry Data

  • After 2Q11 there was reason to believe that the venture environment was improving, but the results were more mixed in 3Q11.  While the amount invested by venture capitalists in 3Q11 was healthy, the amount raised by venture capitalists was significantly off the pace set in the first half of the year.  As a result, venture capitalists are continuing to invest significantly more than they raise, an unsustainable situation (and one that perhaps provides increased opportunities for angels and corporate investors).  IPOs also decreased significantly in 3Q11, although M&A activity was up.  The internet/digital media industry continued to lead, while life science continued to lag.

    However there are some clouds on the horizon, as the Silicon Valley Venture Capital Confidence Index declined for only the second time in 11 quarters, there are reports of a number of IPOs being recently postponed and the world financial environment is undergoing substantial turbulence.

    Detailed results from third-party publications are as follows:

    • Venture Capital Investment. Venture capitalists (including corporation-affiliated venture groups) invested $8.4 billion in 765 deals in the U.S. in 3Q11, a 5% increase in dollars over the $8.0 billion invested in 776 deals reported for 2Q11 in July 2011, according to Dow Jones Venture Source (“VentureSource”).  The largest Silicon Valley investments in 3Q11 were Twitter and Bloom Energy, which were also two of the three largest nationwide.  Northern California received 38% of all U.S. venture investment in 3Q11.

      The PwC/NVCA MoneyTree™ Report based on data from Thomson Reuters (the “MoneyTree Report”) reported slightly different results – that venture capitalists invested $7.0 billion in 876 deals in 3Q11, a 7% decrease in dollars over the $7.5 billion invested in 966 deals reported in July 2011 for 2Q11.  Investments in software companies were at their highest quarterly level since 4Q01, at $2.0 billion; investments in internet companies fell to $1.6 billion after the ten year high of $2.4 billion reported in 2Q11, and life science and cleantech investments fell 18% and 13% respectively from 2Q11.

      Overall, venture capital investment in 2011 is on track to exceed the amount invested in 2010 according to both VentureSource and the MoneyTree Report.

    • Merger and Acquisition Activity. Acquisitions (including buyouts) of U.S. venture-backed companies in 3Q11 totaled $13 billion in 122 deals, a 33% increase in dollar terms from the $9.8 billion paid in 100 deals reported in July 2011 for 2Q11, according to Dow Jones.  The information and enterprise technology sectors had the most acquisitions, and the acquisition of PopCap Games by Electronic Arts for $750 million was the largest acquisition of the quarter.

      Thomson Reuters and the National Venture Capital Association (“Thomson/NVCA”) also reported an increase in M&A transactions, from 79 in 2Q11 (as reported in July 2011) to 101 in 3Q11.

    • Initial Public Offerings.  Dow Jones reported that 10 U.S. venture-backed companies went public in 3Q11, raising $0.5 billion, a significant decrease from the 14 IPOs raising $1.7 billion in 2Q11.  Perhaps of greater concern is that six of the IPOs occurred in July, with only four in the latter two months of the quarter, and half of the 10 companies went public on non-U.S. exchanges (one each on AIM, Australia and Tokyo, two on Taiwan).  By comparison, all 25 companies going public in the first half of 2011 went public on U.S. exchanges.

      Similarly, Thomson/NVCA reported that only five U.S. venture-backed companies went public in the U.S. in 3Q11 (they do not include offerings on foreign exchanges), raising $0.4 billion, a substantial decrease from the 22 IPOs raising $5.5 billion reported in 2Q11.  This was the lowest IPO level in seven quarters.  Of the five IPOs, four of the companies were based in the U.S. and one in China, and four were IT-focused and one was life science-focused.  The largest of the IPOs was China-based Tudou, raising $0.2 billion.

      At the end of 3Q11, 64 U.S. venture-backed companies were in registration to go public, an increase from 46 in registration at the end of 2Q11.

    • Venture Capital Fundraising. Dow Jones reported that U.S. venture capital funds raised $2.2 billion in 3Q11, a significant decline from the $8.1 billion raised in the first half of 2011.  2011 is on track to be the fourth year in a row in which venture capital fundraising will be less than investments made by venture capitalists, and by over $30 billion in the aggregate.

      Similarly, Thomson/NVCA reported that U.S. venture capital funds raised $1.7 billion in 3Q11, a substantial dollar decrease from the $2.7 billion reported raised by 37 funds in 2Q11.

    • Venture Capital Returns. According to the Cambridge Associates U.S. Venture Capital Index®, U.S. venture capital funds achieved a 26% return for the 12-month period ending 2Q11, less than the Nasdaq return of 31% (not including any dividends) during that period.  Note that this information is reported with a one quarter lag.
    • Sentiment. The Silicon Valley Venture Capitalist Confidence Index® produced by Professor Mark Cannice at the University of San Francisco reported that the confidence level of Silicon Valley venture capitalists was 3.41 on a 5 point scale, a decrease from the 3.66 result reported for 2Q11, and the second quarter of decrease in a row.  Venture capitalists expressed concerns due to the macro economic environment, the uncertain exit environment, high company valuations and regulatory burdens.  The divergence between the internet/digital media industry, which has performed well, and the lagging life science industry, was also noted.
    • Nasdaq. Nasdaq decreased 13% in 3Q11, but has increased 10% in 4Q11 through November 14, 2011.

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