A seed in time

New data suggest the size of start-up and seed deals in the U.S. is larger now than even at the peak of the Internet bubble in 2000 –a dramatic recovery from the bear market of 2001-2003 that frightened off many early-stage investors. U.S. venture capitalists put in $4.2 million on average per investment post-bubble versus $3 million pre-bubble. In addition, the number of angel organizations blossomed to 250 in 2005, up from 140 in 2000, said Nancy Saucier, director of northeast operations for the U.S. National Venture Capital Association (NVCA).

"The data indicate a healthy, early-stage market from now through the next four to five years," Saucier said, at conferences on seed, early-stage investing and tech transfer held October 18 and 19 at Boston University. She also pointed to several changes in investment philosophy. Investors are shifting from the hotbeds of research on the U.S. east and west coasts to doing a good deal regardless of the location. Another trend is highly specialized industry investors who focus on energy or other fields.

Looking up in Europe

The climate also appears to be brightening somewhat in Europe. In just the past fortnight, three independent funds for early-stage tech investing were announced in Europe, by Scottish Equity Partners, Sweden’s InnKap, Germany’s Creathor. In the same period, a crop of smaller, government or university-supported, seed funds have also debuted at Imperial College London, Sweden’s Royal Institute of Technology and Chalmers University of Technology, and the Flemish regional investment board. Of course, even a half-dozen swallows don’t make a spring – and overall, data suggest, entrepreneurs in Europe will continue to face high hurdles in raising funds. But the continent’s economic recovery, plus a growing number of tax breaks and subsidies for seed investing, appears to be showing some early fruit.

Certainly, the U.S. seed market remains the main game in global investing: vast, well-informed and tech-happy. And broad trends there tend to get echoed later on elsewhere in the world – so the state of the U.S. market is closely watched. And that state is fairly good, the data suggest. In the third quarter of 2006 venture capitalists invested $6.2 billion in 797 deals, according to the MoneyTree Report released Oct. 24 by PricewaterhouseCoopers and the NVCA. That was down by 8 per cent from the second quarter, but still represented the third consecutive quarter over the $6-billion mark.

'Fresh funds' on the way

During the quarter, early stage and seed dollars increased. First-time financings also were strong. "We are at a point in the investment life cycle where many venture capitalists are deploying fresh funds that have been raised within the last 18 months or so," Mark Heesen, president of the NVCA, said in a prepared statement. "VCs are finding themselves at the beginning of a fairly long runway, betting more on those seed and early stage companies that they believe will have the most promise five to seven years from now. Given the environment, we are pleased to see deal and dollar levels remain relatively stable, as this is indicative of the discipline being applied to investment decisions."

Venture capital investment in seed and early-stage companies rose 10 per cent in dollar terms in the third quarter of 2006 to $1.2 billion going into 278 deals. Seed and early-stage companies accounted for 35 percent of the total deals for the quarter.

In the third quarter U.S. venture capitalists invested $221 million in 18 deals in Chinese companies, $203 million in 18 deals in Indian companies and $46 million in 11 deals in Israeli companies. The study covered companies domiciled in the United States even if substantial portions of their activities are outside of the country.

VCs not venturing

Venture capitalists remain a minority of the funding for seed deals, according to James Geshwiler, managing director of CommonAngels, a New England angel funding group. He said there were 184 venture capital seed financings last year averaging $4.2 million per round, according to figures from the University of New Hampshire (UNH) Center for Venture Research. In total, venture capitalists had 3,008 deals worth $22 billion in 2005. Of that total, 761 were early stage and 184 were seed deals.

Comparatively, angels had 49,500 deals worth $23.1 billion in 2005, he said. The smaller deals could average a few hundred thousand dollars. The UNH Center for Venture Research said there were 227,000 active individual investors in 2005, with an average of four to five investors joining forces to fund an entrepreneurial start-up. Healthcare services and medical devices attracted the largest angel investments, with 20 percent of the total, followed by software at 18 percent and biotech at 12 percent.

Geshwiler said of the 260 angel groups in the United States now, two dozen are in New England. His group's members' average investment is $260,037, or about $33,000 per investment. "Angel groups are beginning to fill the capital gap with $1 million investments," he said. Venture capitalists typically don't go much lower than $1 million.

Networked angels

NVCA's Saucier said angels are becoming increasingly savvy and establishing strong venture networks. "Increasingly people are skipping venture capitalists and using angels and then going to acquisition as an exit strategy," she said.

Angels are increasingly "syndicating" like their venture capital cousins. "In New England 22 angel groups come together once a quarter for syndicating. We try to raise $2 million per quarterly meeting," said Gerry Schaufied, director, Cherrystone Angels of Rhode Island, and a co-founder of the MIT Enterprise Forum

Bob Lamkin, director of Bay Angels in New England and a venture capitalist at TVM, said he expects more activity in terms of angel networks overseas. "They will come to the U.S. to learn to set up an angel network," he said, much like TVM came years ago to learn about how venture capitalists operated.

Angels get wings

Marianne Hudson, chairwoman of the Angel Capital Education Foundation (46 angel groups around the U.S.), Kansas City, Missouri, said she already has worked with angel groups in Scotland and England that were founded by former entrepreneurs. "We're starting to see syndication internationally," she said.

Startups also are going international. In some countries the domestic market is so small that it is necessary to go international from the start for a company to grow. Prof. Martin Haemmig of CeTIM, Ennetbaden, Switzerland said that in his recent research, 12 percent of the $23.4 billion in total U.S. venture capital goes out of country compared with 24 percent of the $5.5 billion in Europe. In Asia. 52 percent goes out, mostly to the United States. In the first half of 2006, 8 percent of U.S. startups went international compared to 12 percent of European ones. When he asked U.S. and European venture capitalists where they would like to invest by 2010, the U.S. VCs said primarily in China and India and European VCs said primarily in Central and Eastern Europe.