Small companies are the critical source of job growth in the United States and venture capital is a primary source of funding for these companies. As would be expected in economically difficult times, venture funding had slowed dramatically. Two sets of data from the National Venture Capital Association suggest that 2011 will be a better year. (NVCA Material) One report discussed venture-backed exits in 2010 and the other was a survey of venture firms and venture capital-funded company CEOs regarding their expectations for 2011.
Venture exits are important because they refresh the cycle of venture funding. Exits return money to limited partners who then will presumably reinvest at least part of what they receive in the exit. Successful exits also give the lps the confidence to continue making investments in venture firms. Without new capital the venture capital companies can’t make new investments, and access to capital for start-up and growth companies becomes more limited. 2010 was a good year for exits. For the full year there were 420 acquisitions, the most since 1985. Less than a third had an announced deal value, but for those the value was over $18 billion. In the fourth quarter there were 85 deals, including 10 for health care companies. IPO activity also picked up substantially, to 72 for the full year, the most since 2004.
The survey of 2011 expectations found that both the venture firms and venture-backed CEOs expected funding and exits to improve. Three-quarters of venture firms say funding will remain the same or increase. Healthcare IT is a particularly hot sector, with 77% of firms saying funding will increase for those firms. On the other hand, VCs were not optimistic that their fund-raising will increase significantly; about a third say it will, a third say it will stay the same and a third say it will decrease. That has to be a concern for the companies relying on VC funding.