Venture capital (“VC”) activity soared in 2014, with both deals and dollars reaching levels not seen in over a decade. According to PriceWaterhouseCoopers and the National Venture Capital Association’s MoneyTree™ Report, VC activity in the United States increased 61% in 2014 to $48.3 billion, up from $30.0 billion in 2013. This is an exceptional improvement, as the total has exceeded the post-dotcom bubble peak of $32.0 billion in 2007 by $16.3 billion. As it stands, 2014 experienced the highest amounts invested since the peak of the dotcom bubble of $105.0 billion in 2000. 2014 investments were spread among 4,356 deals, a 4% increase over 2013 (4,193 deals). The average deal size also saw a significant increase, about 55%, to $11.1 million in 2014 from $7.1 million in 2013.
The software industry accounted for the largest contribution to growth (about $8.6 billion) followed by media and entertainment ($2.8 billion). Only a small handful of industries saw a decrease in investment: telecommunications (-$0.35 billion), networking and equipment (-$0.25 billion), and other (-$0.08 billion).
The software and biotechnology industries account for the largest share of activity, in terms of total dollars invested. Software, in addition to seeing the largest increase in dollars invested, also attracted the largest proportion of the funding at $19.8 billion, accounting for over 41% of total invested capital, spread over 1,799 deals. This is not surprising. Software has become one of the primary innovative sectors in the economy, as evidenced by the growth of software patenting in recent years (see our article on Intellectual Property). It will be interesting to see how recent U.S. Supreme Court decisions impact software patent activity and VC investment going forward. So far there has been no negative impact on VC activity in the software industry. The biotech industry had the second largest share, at $6.0 billion, or 12% of the total, through 470 deals. The following chart highlights the concentration of VC investment among industries:1
Combining certain industries into selected sectors, the life sciences and technology sectors account for the lion’s share of VC activity.2 This has been true over the previous ten years. Combined, these two sectors account for between 61% and 74% of annual VC investment, averaging 66% over the ten-year period 2005 – 2014. However, it is interesting to examine the trends in the data:
During the early half of this period, the growth rate in life sciences VC investment outpaced the growth rate in technology, and life sciences increased market share while technology’s market share declined. Both sectors saw a drop in investment in 2008 and 2009 due to the recession, with investment bottoming out in 2009. However, technology related investment has rebounded strongly, and in 2014 reached a post-dotcom bubble high of $22.8 billion, capturing 47% of total VC investment. Life sciences on the other hand has struggled to match technology’s growth, losing share of investment funds to other sectors, and has had little overall growth since the 2009 trough.
Geographically, California (1) and Massachusetts (2) led the nation in VC investment. California received $27.2 billion in VC funding in 2014, spread over 1,804 deals (about $15.1 million per deal). Massachusetts received $4.7 billion in VC funding in 2014, averaging $11.8 million per deal over 396 deals.
Colorado, Missouri, and Kansas ranked 9th, 23th, and 28st, respectively in amounts invested. The following table highlights the 2014 VC investments for these selected states:
We will continue to monitor the levels and trends in VC investment and what they mean for life sciences and technology related industries and the overall economy. RubinBrown has a dedicated Life Sciences and Technology Services Group that works with local, national, and international companies to provide advisory, assurance, and tax services for entities participating in or supporting life sciences and technology industries.
1The MoneyTree™ Report provides definitions for each industry classification. All Other Industries includes the twelve other MoneyTree™ Report industries of: Business Products and Services; Computers and Peripherals; Consumer Products and Services; Electronics/Instrumentation; Financial Services; Healthcare Services; Industrial/Energy; Networking and Equipment; Retailing/Distribution; Semiconductors; Telecommunications; and Other.
2For purposes of this article, the Life Sciences sector includes the Biotechnology and Medical Devices and Equipment industries. The Technology sector includes the Computers and Peripherals, Networking and Equipment, Semiconductors, Software, and Telecommunications industries.
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