Venture capital dries up as fewer firms raise cash

Just as established businesses continue to see tight credit from lenders, startup and early-stage companies also face a tough year landing venture capital.

Venture capitalists roundly agree that the industry is going to see contraction. A National Venture Capital Association survey of more than 300 VCs showed that 90 percent of respondents predicted the number of firms will decline during the next five years. Of those expecting a contraction, 72 percent believe the decline will be between 1 percent and 30 percent.

“The consolidation of the venture industry will not occur overnight,´ said NVCA President Mark Heesen.  “This process will be a gradual one as fewer firms than has been the case historically will be able to raise funds. Those funds that are raised will generally be smaller and over time, the firms will contract accordingly. Venture capitalists will have to do more with less.”

Access to capital, a difficulty in every industry right now, is already squeezing the smaller VC firms, according to Dave Dwyer, general partner at Vista Ventures. Vista maintains offices in Boulder and Fort Collins and focuses on investing in early- and development-stage companies. Dwyer pointed out that the top 10 to 15 VC firms in the country seem to be raising capital, but that’s about it.

“It’s very difficult to raise money at this time,” Dwyer said, adding that it will likely be difficult for at least 18 months.

Institutional investors, which typically pump big bucks into the VC market, have cut back. Dwyer explained that as those investors’ stock investments have taken a hit, their venture investments become a larger percentage of the total portfolio. Because venture investment is in a higher risk class, few are interested in increasing the weight of their portfolios in that category.

Many venture capitalists are focused on having capital to support existing portfolio companies as necessary in the tough economic climate.

“We’re in a stage in our fund that we’re growing the firms in our portfolio,” Dwyer explained. “I think that’s typical of most Colorado venture funds.”

Shake the MoneyTree

The NCVA works with PricewaterhouseCoopers to publish the MoneyTree Report – a quarterly publication tracking VC investments. Third-quarter VC funding was $4.8 billion nationally, up from $3.3 billion in the second quarter, but down from third-quarter 2008’s $7.16 billion. For the third quarter, Colorado-based companies landed $50.3 million in 13 venture capital deals. That’s down from $201 million in 27 deals during the third quarter of 2008.

The third-quarter report also found that companies receiving first-time financing were seeing smaller investments. The overall number of first-time deals was flat at 155, but the total dollars invested was down 20 percent to $633 million. It was the lowest dollar level since the survey started in 1995.

Early-stage companies might have a hard time finding other sources of capital, too.

“The availability of angel capital seems to have declined,” Dwyer said.

He pointed out that angel investors, just like institutional investors, have taken a hit to their portfolios in the past year making them risk averse. Dwyer is hopeful that Colorado’s new tax credit will prove useful in what promises to be a difficult year. House Bill 1105, passed last year effective Jan. 1, provides tax credits to individual investors who help fund startup companies.

The difficulties in the capital markets are taking their toll on startups. Even the highest quality opportunities have to expand their search for capital, looking nationally rather than locally for funds, Dwyer said. However, VC firms aren’t likely to be looking to stretch geographically in the next year. The NVCA survey showed that 72 percent of respondents planned to remain in their geographical footprints for 2010.

“Early-stage companies will have to find ways to grow without outside resources,” he said.

Some companies might have it easier than others just by the nature of their industries. Dwyer points to clean technology and geographic information systems as “hot” industries. The NVCA survey concurs on clean tech, with 54 percent of respondents predicting an increase in investment for the industry this year..

Kristen Tatti covers the banking industry for the Northern Colorado Business Report. She can be reached at 970-221-5400, ext. 219 or ktatti@ncbr.com.

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