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PRIVATE EQUITY: VENTURE 2012 could be characterized as a repeat of recent years for venture capital, with one notable exception: the Facebook IPO. The venture capital industry continued to contract in 2012, with fewer firms raising less capital. Exit activity moderated throughout the year and industry performance held steady. While the Facebook IPO was covered extensively in FEG’s Research Reviews and in the popular press, we believe this deal was likely a once-in-a-generation return for venture investors. As such, the venture funds that invested early in Facebook (and even some of the later investors) made extraordinary returns despite the volatile path the company took in the public markets. Even some purchases of Facebook on the secondary market turned out quite well, provided they were not made in the two years leading up to Facebook’s IPO. Anecdotally, the message we have been hearing from venture fund managers is that it is time to return to basics. Visions of quick returns from social gaming, social networking, and other consumer ventures are being replaced with a focus on building long-term value. Popular investment themes for venture funds include the migration to cloud computing, harnessing the amount of data flowing through the network (big data), and the continued development of the SaaS (software as a service) business model. Fundraising and Investing Environment Last year was the third consecutive year to see an increase in venture capital raised. Despite this increase, the estimated number of active venture funds continued to drop. Even among those active funds, a meaningful percentage might not be considered to be “institutional”. For example, approximately one-third of all U.S. venture capital funds formed in 2012 were capitalized with $50 million or less. 1 Additionally, a relatively small number of funds accounted for an increasing share of the aggregate capital. Similar to the third quarter, the five largest funds in the fourth quarter accounted for 55% of the total capital raised. 2 Investment in companies fell 10% in 2012, reversing the rising trend in 2010 and 2011. 3 The most active sectors continued to be software, biotechnology, clean technology, and Internet-related companies. The software sector was the only sector to experience an increase in investment during 2012. (Billion) U.S. Venture Capital Investment Through December 31, 2012 $35 $30 $25 $20 $15 $10 $5 $0 Venture Fundraising Venture Investment Estimated Active Funds 2007 2008 2009 2010 2011 2012 Page 6 1,000 Source: National Venture Capital Association, Press Release dated January 7, 2013, and MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters; Estimated Active Funds from NVCA reports and reflects the number of funds raising capital in a given year plus the prior three years. 900 800 700 600 500 400 300 200 100 - Estimated Active Funds FOURTH QUARTER 2012 Nathan C. Werner, CFA Senior Vice President “Visions of quick returns from social gaming, social networking, and other consumer ventures are being replaced with a focus on building long-term value.” © 2013 Fund Evaluation Group, LLC
Exit Environment Page 7 FOURTH QUARTER 2012 Venture-backed exits slowed in 2012, as IPO activity dropped following Facebook’s messy IPO in May. 4 The number of acquisitions of venture-backed companies fell for the third straight year, but the aggregate dollars spent remained in line with longer-term averages thanks to several transactions in excess of $1 billion. Large corporations looked to venturebacked companies to provide innovative technology, products, and services. In the second half of 2012, VMWare purchased Nicira Networks for $1.25 billion, Microsoft bought Yammer for $1.2 billion, Facebook bought Instagram for $1.0 billion, and Cisco purchased Meraki, Inc. for $1.25 billion. Performance Venture Capital Exit Activity Through December 31, 2012 31, 2012 Number of Venture-Backed Companies 600 500 400 300 200 100 Median performance was again in the single-digits for venture investors. More recent vintage years are seeing performance creep higher, as funds benefit from the exit environment. Global Venture Capital Quartile Performance As As of September of September 30, 2012 30, 2012 20% 15% 10% 5% 0% Vintage Year IRR Global Venture Capital Quartile Performance -5% -10% -15% 0 Source: Source: Preqin Preqin 467 416 Acquisitions IPO 87 7 13 68 51 49 Source: NVCA Press Release Release "Venture-Backed Exits Exits Enjoyed Enjoyed HIgher Average Values on on Lower Total Total Volumes in 2012"; in 2012"; 1/2/2013 Top Quartile Median Bottom Quartile 2000 2001 2002 2003 2004 2005 2006 2007 2008 1 Preqin, www.preqin.com, accessed February 1, 2013 2 NVCA Press Release “Venture Capital Funds Raised $20.6 billion during 2012”; January 7, 2013 3 The MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters 4 NVCA Press Release “Venture-Backed Exits Enjoyed Higher Average Values on Lower Total Volumes in 2012”; January 2, 2013 351 521 488 435 © 2013 Fund Evaluation Group, LLC
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