WASHINGTON, Dec. 19, 2013 Venture capitalists invested $7.8 billion in 1,005 deals in the third quarter of 2013, according to the MoneyTree Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters. Quarterly venture capital (VC) investment activity rose 12 percent in terms of dollars and 5 percent in the number of deals compared with the second quarter of 2013 when $7.0 billion was invested in 956 deals. When compared with the first three quarters of 2012, both the dollar and deal totals for the first three quarters of 2013 track slightly higher, however the dollar and deal totals for the first three quarters of 2011 exceed those of 2013.
The Software industry received the highest level of funding in the third quarter of 2013, exceeding the $3 billion mark for the first time in 12 years with $3.6 billion flowing into the sector during the quarter. The Software industry also counted the most deals in Q3 at 420, a 23 percent increase from the 342 rounds completed in the second quarter of 2013. Nine of the 11 largest investments in Q3 went into Software companies.
It’s an exciting time to be an entrepreneur with a software company, remarked Mark McCaffrey, global technology partner and software leader at PwC US. “More venture capital dollars are going into more software deals than we’ve seen in the past decade. The continued increase in valuations for innovative and disruptive technologies in software-related companies, coupled with the increase in exit activity, is driving venture capitalists to make more investments in this space. And, at the current pace of investing, we should see total venture capital investments in 2013 exceed the annual total from 2012.
With more than half of this quarter’s deals coming from early and seed stage deals, there’s credible reason to be optimistic about the future of innovation and the vibrancy of the startup ecosystem. Software is a natural increased area of focus given that many tech deals are less capital intensive to get to proof of concept, said John Taylor, head of research at the NVCA. We are balancing this optimism, however, against the recognition that VCs are still trying to gain exits for the previous generation of companies. There is some improvement on that front but we would like to see it strengthen even further, Taylor added.
While a distant second, the Biotechnology industry was the second largest sector for dollars invested with $852 million going into 123 deals, falling 39 percent in dollars but rising 10 percent in deals from the prior quarter. The Medical Device industry received the third largest investment total in Q3 with $566 million going into 65 deals, which represented a 12 percent increase in dollars but an 8 percent decline in deals. Investments in the Life Sciences sector overall (Biotechnology and Medical Devices) dropped 26 percent in dollars but rose 3 percent in deals. Looking at the first three quarters of the year, overall Life Science investing remains depressed with 541 deals reported in 2013, marking the lowest nine-month total since 2005. The Media & Entertainment industry received the fourth largest investment total in Q3 with $541 million going into 100 deals.
Venture capitalists invested $1.5 billion into 252 Internet-specific companies during the third quarter of 2013. This investment level is 19 percent lower in dollars and 9 percent lower in deals than the second quarter of 2013 when $1.9 billion went into 277 deals. Only one of the largest 11 rounds for the quarter was in the Internet-specific category. âInternet-Specific’ is a discrete classification assigned to a company with a business model that is fundamentally dependent on the Internet, regardless of the company’s primary industry category.
The Clean Technology sector, which crosses traditional MoneyTree industries and comprises alternative energy, pollution and recycling, power supplies and conservation, declined 20 percent in dollars and 7 percent in deals with $297 million flowing into 40 deals. The third quarter of 2013 marks the seventh consecutive quarter of declining investment levels in the Clean Technology sector.
Eight of the 17 MoneyTree industry categories experienced decreases in dollars invested in the third quarter, including Consumer Products & Services (78 percent decrease) and IT Services (28 percent decrease). The Computers and Peripherals sector experienced a large jump in investment levels, rising to $274 million, primarily due to a single large deal, which was the third largest in the quarter.
Stage of Development
Seed stage investments dropped 4 percent in dollars and rose 12 percent in deals with $146 million invested into 48 deals in the third quarter. Early stage dollar investments rose to their highest level in 12 years, rising 7 percent in dollars and eight percent in deals from the prior quarter to $2.7 billion going into 538 deals. Seed/Early stage deals accounted for 58 percent of total deal volume in Q3, slightly ahead of the second quarter of 2013. The average Seed deal in the third quarter was $3.0 million, down from $3.5 million in the second quarter. The average Early stage deal was $5.0 million in Q3, down slightly from $5.1 million in the prior quarter.
Expansion stage dollars increased 21 percent in the third quarter, with $2.6 billion going into 235 deals. Overall, Expansion stage deals accounted for 23 percent of venture deals in the third quarter, identical to the second quarter of 2013. The average Expansion stage deal was $11.1 million, jumping up well over $1 million from $9.6 million in Q2 2013.
Investments in Later stage deals increased 9 percent in dollars but fell 4 percent in deals to $2.3 billion going into 184 rounds in the third quarter. Later stage deals accounted for 18 percent of total deal volume in Q3, compared to 20 percent in Q2 when $2.1 billion went into 191 deals. The average Later stage deal in the third quarter was $12.6 million, up from $11.2 million in Q2 2013.
First-time financing (companies receiving venture capital for the first time) dollars increased 11 percent to $1.3 billion going into 346 companies in Q3, an 8 percent increase in the number of deals from the prior quarter. First-time financings accounted for 16 percent of all dollars and 34 percent of all deals in the third quarter, identical to the totals seen in the second quarter of 2013. The average first-time deal in the third quarter was $3.7 million, up from $3.6 million in the prior quarter.
Companies in the Software industry captured nearly half of first-time investments in the third quarter, accounting for 49 percent of the dollars and 47 percent of the companies receiving funding in Q3 with $627 million going into 163 companies. The Life Sciences sector, however, dropped 56 percent in dollars from the prior quarter to $150 million while the number of companies receiving funding for the first time rose 31 percent to 47. Through the first three quarters of 2013, only 104 Life Sciences companies received venture capital for the first time, the lowest number for the first three quarters of any year since 1996.
Seed/Early stage companies received the bulk of first-time investments, capturing 72 percent of the dollars and 84 percent of the deals in the third quarter of 2013.
MoneyTree Report results are available online at www.pwcmoneytree.com and www.nvca.org.
The survey includes the investment activity of professional venture capital firms with or without a U.S. office, SBICs, venture arms of corporations, institutions, investment banks and similar entities whose primary activity is financial investing. Where there are other participants such as angels, corporations, and governments, in a qualified and verified financing round the entire amount of the round is included. Qualifying transactions include cash investments by these entities either directly or by participation in various forms of private placement. All recipient companies are private, and may have been newly created or spun-out of existing companies.
The survey excludes debt, buyouts, recapitalizations, secondary purchases, IPOs, investments in public companies such as PIPES (private investments in public entities), investments for which the proceeds are primarily intended for acquisition such as roll-ups, change of ownership, and other forms of private equity that do not involve cash such as services-in-kind and venture leasing.
Investee companies must be domiciled in one of the 50 U.S. states or DC even if substantial portions of their activities are outside the United States.