Venture capitalists are likely to invest fewer dollars this year, but that doesn’t signal doomsday for entrepreneurs with solid business models.
"I think we will be seeing much better deals being done, much better entrepreneurs being funded," says Mark Heesen, president of the National Venture Capital Association. "There will be less duplicative deals."
Heesen's remarks on a media call yesterday came as the venture capital industry released its fourth quarter and full year results.
Venture capitalists invested $26.5 billion in 3,698 deals in 2012. That's down 10 percent in dollar terms and down 6 percent in deal volume from 2011, according to the MoneyTree Report by PricewaterhouseCoopers LLP and the National Venture Capital Association, based on data from Thomson Reuters.
Seed-stage companies had a particularly rough go in 2012, with investments falling 31 percent in dollar terms and 38 percent in deal volume. Last year $725 million was invested into 274 companies, the lowest annual seed dollars since 2003.
This trend is likely to continue, as the number of funds being raised continues to shrink. Several years back, venture firms had an excess of money that they couldn't spend fast enough. Nowadays they are investing more than they raise. This has led to firms becoming more discriminating -- taking closer looks at business plans and future prospects before investing. They are also using their money to support the companies already in their portfolio.
"Money for start-ups is likely to stay tight this year," said John Backus, founder and managing partner of New Atlantic Ventures, on the media call yesterday. New Atlantic, based in Reston, Va., and Cambridge, Mass., is an early-stage venture capital firm.
Despite some of the challenges start-up companies face, Heesen of the National Venture Capital Association believes there are many opportunities for seasoned entrepreneurs. As a result, he expects the success rate of the deals in 2013 to be higher.
This year healthcare and national security companies are expected to be among the hot sectors. In 2012, software remained the single largest investment sector, with dollars rising 10 percent over 2011 to $8.3 billion, which was invested into 1,266 deals, an 8 percent rise in volume over the prior year. This represented the highest level of investment in the software sector since 2001.
Of course, many challenges for entrepreneurs remain. Among these is continued uncertainty about tax rates.
"No company likes to live under an umbrella of uncertainty," Backus said on the call. "Businesses don't know the rules they are supposed to operate by and when they think they know them, they change." Backus says more certainty in the tax code would help. He said he would like to see Congress set the rates and keep them there.