Venture capital investments fell 10% in 2012 as election, ‘cliff’ create uncertainty

January 18, 2013

Venture capital investments nationwide took a tumble last year as economic uncertainty created by the presidential election and contentious “fiscal cliff” negotiations caused some financiers to hold onto their checkbooks.

Investors funneled $26.5 billion to companies in 3,698 deals during 2012, a 10 percent drop in dollars and 6 percent decline in number of deals compared with the prior year, according to a report issued Friday by National Venture Capital Association and PricewaterhouseCoopers, which based their analysis on Thomson Reuters data.

The decline didn’t come as a complete shock. Investors had become unnerved by the slow pace of the economic recovery as well as the uncertainty created by the presidential election and the battle to avert an automatic set of spending cuts and tax increases in the fiscal cliff.

“Venture capitalists are no different from other investors. When they see that kind of uncertainty, it makes them more cautious about the rate at which they deploy capital,” said Tracy Lefteroff, the global managing partner of the venture capital practice at Pricewaterhouse­Coopers.

During the fourth quarter, the value of deals completed fell 13.3 percent to $6.4 billion compared with the fourth quarter of 2011, according to the report.


Annual venture capital investments in the United States. (The Washington Post/Sources: PricewaterhouseCoopers, National Venture Capital Association)

In the Washington region, the decline was more severe. The dollar value of local investments tumbled a staggering 46.5 percent during the fourth quarter compared with the year before. Ultimately, 39 companies collected about $95 million.

(For a more detailed explanation of the local numbers, check out Monday’s edition of Capital Business, The Washington Post’s local business publication.)

But the investment decline did not hit all industries equally.

Software companies, for example, raised $8.3 billion from venture capitalists in 2012 — the most for that sector in the past decade. Internet companies saw their second-highest level of investment since 2001, raising $6.7 billion last year.

The biotechnology and clean technology industries, on the other hand, got clobbered. Those industries saw investment dollars decline 15 and 28 percent, respectively, compared with 2011. Companies in those industries tend to require more money and time to reach maturity, meaning investors need a degree of patience and risk tolerance that’s harder to find in these economic times.

“It was like Charles Dickens and the ‘Tale of Two Cities,’ ” said John Backus, managing partner at New Atlantic Ventures, a Northern Virginia venture capital firm. “ ‘It was the best of times, it was the worst of times.’ ”

Analysts are cautiously optimistic about whether the venture capital market will improve this year. Investors are struggling to raise funds from their own financial backers — called limited partners — meaning they have less cash in their coffers to invest in young companies. Those investors have begun to seek investments in safer markets with more reliable returns. As a result, some expect venture capital investments to continue to decline.

“We’ve now had five years where the venture industry has invested more dollars than it’s actually raised,” Mark Heesen, president of the National Venture Capital Association, said on a conference call. “And while Washington, D.C., can do this seemingly forever, venture capital firms can’t.”

Then there are the still-unanswered questions about federal spending and the budget deficit. With legislators poised for another combative debate in the not-too-distant future, the impact of those talks on their ability to take companies public remains to be seen.

“A lot of it depends on the next 60 days and what the mood is coming out of Washington,” Lefteroff said. “We’re going to see that uncertainty continue to be here for the short term and that’s going to still have an impact.”

Steven Overly covers the business of technology, biotechnology and venture capital in the Washington region for The Washington Post and its weekly Capital Business publication. In that capacity, he has written about start-up struggles, investment trends and major drug discoveries. Steven graduated from the University of Maryland’s Philip Merrill College of Journalism. He resides in the District.
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