Dr Jeff Cornwall

The National Dialogue on Entrepreneurship summarizes a report issued by the National Venture Capital Association (full report must be ordered through the NVCA site):
“The venture capital (VC) business seems to be following larger entrepreneurship trends as recent data from the National Venture Capital Association (NVCA) suggest that the VC business is looking up. First, new data on VC performance in the first quarter of 2004 show that VC investments posted a one-year return of 15.4%—the first double-digit rise since 2000. Returns over a three-year period are still negative (-13.3%), but the long term picture is pretty good. Over a 20-year period, VC investments return an average of 15.7 percent (compared to S&P 500 returns of 13.1%). NVCA has also released a new study (by Global Insight) that examines the performance of VC-backed companies during the 2000-2003 downturn. The study finds that firms receiving VC investments between 1970 and 2003 performed quite well, even in tough economic times. Between 2000 and 2003, these firms grew jobs (by 6.5%) and revenue (11.6%) at a rate that far outpaced the overall performance of the US economy.”
With improved performance comes more money invested in these funds. This increase in available capital will increase the deal flow from VCs. It is important to note that last year VCs only invested in about 2500-2700 deals. This is a small niche in the overall entrepreneurial economy, but an important one as these are the companies that can have significant impact and can build momentum in a market that all participants can benefit from over the next several years.
Indeed, here in Nashville I am hearing of stronger level of deal interest and improving deal flow among VCs, as seen in this article from the Tennessean.
As funds grow, they will also start to invest in earlier stage ventures. We have seen a very conservative posture on the part of VCs over the past three to four years. They have favored later stage deals with lower return potential and lower risk, that is, more conservative investments.
A MoneyTree report issued this week reported $5.6 billion invested in 761 companies in the second quarter of 2004. This is a 12% increase from the first quarter, which was also strong. More importantly, deal flow is now starting to go to earlier stage ventures, a sign of increasing VC optimism for the economic outlook of the next three to five years.