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Whither early-stage VC?

PEHub has a blog posting on the shift to late stage investing by VCs.  However, the data in this posting is really about funds-raised, not funds-invested.  I've always been wary of measuring the VC industry by quarterly fund-raising.  I think that you have to look at annual trends.

Fund-raising is a very lumpy process.  Firms can spend 6-18 months raising money, and the market is still relatively small that you can't read too much into quarterly ebbs and flows.  Also, it's no surprise that on a dollar basis that late-stage VC is dwarfing early-stage VC.  Later stage rounds are bigger, so the funds that invest in them are likely to be bigger.

I think that it is more interesting to look at new company creation.  There is some sort of lag in reporting to things like VentureSource, but you can look at this retrospectively to find some trends.

I did a quick search on VentureSource for all types of IT companies in New England.  Here is the number of companies reporting a first financing in each year:

2007 (to date)       17

2006                    38

2005                    39

2004                    34

2003                    40

2002                    36

Now this isn't 100% comprehensive or precise, but I believe it to be directionally correct.  And, it says that early-stage IT VC investing in New England is pretty steady. 

Remember how dead it felt in the market after September 11, 2001?  The number of new companies created has been steady since then.  It may be pretty scary to think that this is the total number of deals done per year given how much money and how many 'early-stage' VC firms there are in the area.  That is probably why these funds are now doing more later stage investing and sometimes raising separate later stage funds.

What does this all mean?  There is quite a bit of late-stage money being raised, but who is funding lots of early-stage companies for these late-stage investors to pick?  It seems to me that this is out of whack.  I continue to think that despite there being lots of money out there, very few New England investors are willing to do early-stage deals.  The number of early financings done in the past few years seems to back this up.


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