Venture Capital (英国国家科技艺术基金会 (NESTA))

Researchreport:July2010VentureCapitalNowandAftertheDotcomCrashYannisPierrakis2NESTAistheNationalEndowmentforScience,TechnologyandtheArts.OuraimistotransformtheUK’scapacityforinnovation.Weinvestinearly-stagecompanies,informinnovationpolicyandencourageaculturethathelpsinnovationtoflourish.VentureCapitalNowandAftertheDotcomCrashForewordThefutureprosperityoftheUKdependsonthecountry’sabilitytofosterandsupportgrowthbusinesses.Theventurecapitalindustryisideallyplacedtobeacornerstoneofthissupportand,thoughyoungerthantheUSindustry,UKfundshavealreadyhadsomenotablesuccesses.Thefinancialcrisishashitallaspectsoftheprivateequitymarkethard,andthisreportshowsthatventurecapitalisnoexception.Withinvestmentandfundraisingslumping,itwouldbeeasytobecomedisheartenedbutourresearchhighlightssomepromisingsigns.Successfulexitshaveyieldedgoodreturnsforfundseveninthecurrentrecession;agoodpipelineofinvestmentsinitiatedbetween2004and2007shouldbearfruitoverthecomingyearsandtheintroductionoftheInnovationInvestmentFundshouldhelpencourageinvestmentinnewbusinessesoverthenextfewyears.Thisyearlookssettobetoughbuttheindustryhasdemonstrateditsabilitytoworktogethertogettherightleveloffundingtotheverybestgrowthbusinesses.ThisworkispartofaseriesofresearchprojectsledbyNESTAwhichcomplementsourownpracticalexperienceofrunningaventurecapitalfundtargetedatearly-stagecompanies.Asever,wewelcomeyourviews.MatthewMeadManagingDirector,NESTAInvestmentsJuly,20103ExecutivesummaryHighgrowth,innovativecompaniesaredisproportionatelyimportantforeconomicgrowthintheUK.Venturecapitalisanimportantsourceoffinanceforthesecompanies,oneofthefewsourceswithanappetiteforriskthatmatchestheuncertaintythatcomeswithpioneering,innovativeventuresandtheabilitytoprovidemanagementsupporttotakeacompanyfrominitialproofofconcepttomassmarketgrowth.Thishasseenventurecapitalactasacatalystfornewindustriesandground-breakingglobalcompanies.Andyet,theventurecapitalindustryintheUKhasbeeninaperiodofdecline.Thishasbeenparticularlytrueforearly-stageventurecapitalasNESTAoutlinedlastyear.Thisreportprovidesanupdateontheventurecapitalmarketin2009,examinessimilaritiesanddifferencesbetweenthecurrentcrisisandtheonetriggeredbythedotcomcrashandconsidersprospectsforarecovery.Theventurecapitalindustrysawfurtherentrenchmentin2009acrossallareas.Investmentactivityhasnowseenanoverall40percentreductionoverthepasttwoyears,thenumberofexitshasfallenby40percentandfundraisingfellbyover50percent(bothintermsofthenumberofnewfundsandtotalamountsraised).Thecurrentcrisisappearstohavecompoundedissuesthattheventurecapitalindustrywasalreadyfacingfollowingthedotcomcrash.Twofeaturesparticularlystandoutabouttheventurecapitalmarketnow:• Fundraisingin2009wasthelowestseeninthepastdecade.Boththedotcomandfinancialcrisesresultedinasignificantreductioninthenumberofnewventurecapitalfundsestablished.Howevercurrentfundraisingactivityisconsiderablylowerthanlevelsseenafterthedotcomcrashandconsequentlyitisatthelowestlevelseeninthelastdecade.• Thetimetakentosuccessfullyexit,throughaflotationoracquisition,isgettinglonger.Acrosstheworld,thetimetakentosuccessfullyexitthroughflotationnowaveragesalmostsevenandahalfyears,thelongesttimeseenoverthepasttwodecades.ThisglobaltrendisreflectedintheUKmarket.Thisobviouslyhasknock-onimpactsonreturnswhichleadstomakingitharderforfundstoattractmoremoneyinordertobeabletoinvestinnewcompanies.Thesituationnowwouldbefarworsewithoutpublicfunding.Publicfundshardlyfeaturedinthedotcomerabutnowtheyparticipatein40percentofallventurecapitaldealsand56percentofallearly-stagedeals.Even,atthisstage,thefundamentalsoftheUKventurecapitalmarketappeartobesound,illustratedbythefactthatfundsareexitingcompanieswithgoodreturnsinthisrecession.Therecoveryoftheventurecapitalindustryhingesonexits.Astheeconomyrecovers,andthemergerandacquisitionmarketreturns,fundperformanceshouldstabiliseandimprove.Theventurecapitalmarketappearstobewellplacednow.Followingthedotcomcrash,significantamountsofcapitalwereinvestedinalargenumberofnewcompanies(between2004and2007).Theseinvestmentsshouldbearfruitoverthenextfewyearsandasfundssuccessfullyexitthesecompanies,limitedpartnerconfidenceinventurecapitalasaprofitableassetclasswillreturn.4AcknowledgementsTheauthorwouldliketothankthosewhoreviewedthereport,particularlyShanthaShanmugalingamandAlbertBravo-Bioscafortheirvaluablecontributions.5ContentsVentureCapitalNowandAftertheDotcomCrashPart1:Introduction7Part2:Investmentactivityoverthelastdecade9Part3:Investmentactivitywithinindividualsectors18Part4:Fundraisingactivityoverthelastdecade22Part5:Conclusions24AppendicesAppendix1:Methodologyanddataanalysis26Appendix2:Variables27Appendix3:Regressionanalysis29Appendix4:Tablesandfigures34ListofFiguresFigure1:Early-stageventurecapitalinvestmentsasaproportionofGDPpercountry,20088Figure2:Venturecapitalinvestments,numberofcompaniesbystage,2000-200910Figure3:Venturecapitalinvestments,amountinvestedbystage(£m),2000-200910Figure4:Venturecapitaldealsbysource,2000-200911Figure5:EarlyStageventurecapitaldealsbysource,2000-200912Figure6:N