Many startups and young companies rely on venture capital investments to spur their growth and development, but such investment has decreased over the last fiscal year. With VC investment levels improving since the recession, but still well below what they were prior to it, 2012 reflects a declining trend in VC investment as compared to 2011. Some cite the presidential election as a contributing cause of this, suggesting investors were wary of potentially higher taxation rates on income and capital gains and that lower taxation rates on capital gains provide greater incentives to invest through venture capital firms. Additionally, with the Bush tax cuts expiring in January 2013 if they are not renewed, investors may be more cautious given the uncertainty regarding potentially higher taxes that may be owed upon cashing out investments. Only time will tell how President Obama’s reelection will influence investor behavior in the post-election period and through the next fiscal year.
According to a PricewaterhouseCoopers LLP and National Venture Capital Association (NVCA) report, investment for the first three quarters of 2012 totaled $20 billion in 2,661 deals, down from the results of the same period in 2011. Further, in the third quarter of 2012, venture capital investment decreased in terms of both dollars and deals across all stages of development. Additionally, venture capitalists invested a total of $6.5 billion in some 890 deals, representing an 11% VC investment dollar decline and a 5% deal decline from the second quarter of 2012. First-time financing dollar investments also declined 8% to $1.0 billion in the third quarter, though the number of deals invested in increased 1% to a total of 297 deals. Overall, it is predicted that the record of both dollar investment and deal volume will be appreciably lower at the end of 2012 than the previous year.
Reflecting on this decline, NVCA President Mark Heesen commented, “Information technology investment continues to be very strong, particularly in the Internet arena while life sciences investment remains low, reflecting ongoing concerns regarding regulatory uncertainty, capital intensity and investment time horizons in the space. We also continue to see clean tech investment shifting concentration to smaller, more capital efficient deals. Opportunities continue to abound in each of these sectors, but lower venture fundraising levels will push investment dollars down as the industry recognizes it cannot put out more money than it takes in.” As a result of the recession, the market has been less welcoming and favorable to companies’ initial public offerings, making it quite difficult for their investors to make a profit. Further, poor responses to IPOs mean such investors are unable to recover as much of their investments to direct toward other startups, though this does not by any means leave all promising young companies without hope.
While not all are unable to secure funding and not all venture capital funds are shrinking, there is a very real trend of limited partner financiers favoring less risky investments and investing exclusively in select venture capital firms, rather than investing more broadly. With a new year approaching, it will be interesting to see whether the completion of the election and the tax decisions that follow will reverse the declining investment trend of 2012.
____________________________ Steven Overly, U.S. Companies Find Venture Capital Harder to Find, Wash. Post, Oct. 24, 2012, available at http://www.washingtonpost.com/business/capitalbusiness/us-companies-find-venture-capital-harder-to-find/2012/10/24/0f429b48-1d24-11e2-b647-bb1668e64058_story.html.  Id.  Caroline Traylor and Emily Mendell, Venture Capital Investments Decline in Dollars and Deal Volume in Q3 2012, PwC, Oct. 19, 2012, available at http://www.pwc.com/us/en/press-releases/2012/venture-capital-investments-q3-2012-press-release.jhtml.  Id.  Id.  Id.  Id.  Id.  Steven Overly, supra note 1.  Id.