Venture capitalists have been affected
by the dot-com bubble burst and recession of 2000-1. Because
VCs are financiers, who expect a return of 25-35% per year over
the life of their funds1,
they are increasingly focusing on lower-risk activities. The
following graph from Ernst and Young and VentureOne confirms
this trend:
The amount of seed funding is so relatively small, to see the
declining trend at this early stage, it is necessary to view
this portion of the data separately.
While the absolute amounts of seed stage funding has steadily
decreased, the amount of seed funding as a percent of total VC
investment has also decreased, from 1.6% in 1997 to 0.53% in
2004. The average for this period was 0.78%. While seed stage
funding has seen a declining trend, late stage funding is increasing
(as a percent of total investment).
The data in columns refer to the total amount of funding (in
$millions) in the later rounds by VCs.
The data in the line shows the increasing trend in later stage
funding as a % of total VC investment for that year. This figure
has steadily increased from a low of 35 % in 1997 to a high of
45% in 2004. The average for this period was 38%.
Funding the “ Valley
of Death”2,
the metaphor that characterizes the chasm between the funding
of basic research and applied research, is the critical bottleneck
in the innovation cycle. An analysis by the Council on Competitiveness,
the National Innovation Inititave Final Report3,
shows that the “capital chasm” is in the early stage: right
where ATP focuses, and where VCs do not.
____________________
1 B.
Zider, “How
Venture Capital Works” Harvard Business Review,
November 1998 (pg 131-137)
2 Term that is often attributed
to Congressman V. Ehlers, Ph.D (R-MI)
3 National
Innovation Initiative Final Report: Innovate America ,
Council on Competitiveness, December 2004.
Factsheet 1.C11 (March 2005 by Prasad Gupte)
|
