As the venture capital world contemplates its prospects for 2012, it’s tough to see beyond what will undoubtedly be the most celebrated IPOs of the last 10 years. That is, in part, because the venture outlook, while not bleak, is not exactly fomenting great anticipation. And with the Facebook IPO set to launch early in the year, early investors, which included several venture capital firms, are readying for returns that will likely make their decade. While it is certain to dominate the headlines for much of the year, will the Facebook IPO be enough to breathe new life into the struggling venture capital industry?
In his remarks to industry groups over the last couple of months, Mark Heesen, president of the National Venture Capital Association (NVCA) presented his take on some trends that would indicate that it will likely take more than a historic IPO to turn things around.
Among the trends Heesen sees plaguing the industry in 2012:
- A continued consolidation, or contraction, of the industry which has already shrunk by 55% to 462 VC firms since its high of more than a thousand in 2000. The amount of invested capital is down nearly 80%.
- Although fund raising is up ($18 billion in 2011 versus $14 billion in 2010) it isn’t keeping pace with the amount invested which means venture investments will decline in 2012.
- Corporate venture capital, led by juggernauts like Intel and Google, will continue to squeeze out independent funds and fill the void left by venture funds with seed stage companies
- Series A funding in life sciences continues to decline at an alarming rate. VCs are becoming less inclined to deal with the FDA and the lengthening turnaround time for exits.
- The current level of IPO activity is still well below what is needed to generate the required capital turnover for industry growth. Although there are already 60 companies in the pipeline, Heesen says that at least 100 IPOs are needed to create the capital flows needed.
- With the East and West coasts attracting the vast majority of venture capital deals, companies in the Midwest, especially life sciences startups will struggle for survival.
While no one will mistake his comments for anything resembling a rosy outlook, Heesen has effectively set the stage for a positive turnaround based on lowered expectations. Anything the industry can muster from a stronger economy and improved investor sentiment will be gravy. And, of course, there will always be Facebook.
