The Ups and Downs of Venture Capital

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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Remember 007? Bond, James Bond? Remember his awesome Aston Martin? Wondering what that has to do with venture capital? Keep reading.

First quarter 2010 numbers are in, and Venture Capital investment in both dollars and deals were down. The good news, if you can call it that, is that it's better than Q1 2009.

"But hang on," you say, "I looked at the MoneyTree™ Report myself, and VCs plunked down $4.7 billion in 681 deals. That ain't chump change."

True, a million here and a million there, as Senator Dirkson famously put it, pretty soon you're talking about real money. But compared to 10 years ago this year's first quarter investment was puny. Venture funds invested $27 billion in the first quarter of 2000 and $100 billion by the end of the year.

"Maybe so," you say, "but somebody put almost $5 billion, with a 'B', in their company checking account since last Christmas."

You're right again. Clean technology investments jumped almost 90% in dollars and almost 50% in the number of deals. If your company is in alternative energy, pollution and recycling, power supplies and conservation, you might have attracted some of that capital. In fact, five of the top 10 biggest rounds went to clean technology companies.

Ever hear of Fisker Automotive in Irvine, CA? Me neither. But VC Kliner Perkins and two undisclosed firms put over $115 million into the company, and it was the 5th round. Fisker plans to build 15,000 very hot-looking Kama plug-in hybrid electric cars the next year, and 100,000 in the following three years. By outsourcing almost everything, they figure to be profitable after selling the first year's production. The $80,000 price tag will, no doubt, help.

Probably never heard of Henrik Fisker either, right? He's the Aston Martin connection. He designed the DB9 when he worked for Aston Martin; also the V-12 Aston Martin Vantage, and the BMW Z8. You won't be surprised to hear he worked on the electric Tesla too. But back to the venture capital scene.

It wasn't as exciting in the life sciences sector (biotech and medical devices). Both dollars and deals were down by about 25%. But for the last year life sciences has been the leader in dollars invested, and there were some folks at Amyris Biotechnology who were thrilled with the $51,000,000 they received. You've probably never heard of them either, but they're trying to make fuel out of beer, believe it or not.

They have a proprietary process that uses, "a well established fermentation process that uses our genetically-engineered yeast strains to convert the sugar source into target molecules such as farnesene." Farnesene, you see, is a molecule that is the basis for diesel fuel and automotive oils and lubricants, among other things.

Biotechnology, including Amyris, received more funding than any other industry last quarter. Software, biotechnology, and financial services received the highest level of first-time financing with deals averaging $4.7 million. Predictably, seed/first stage companies received most of the first-time financing.

The medical devices sector was down almost $30% in the first quarter, and that dragged the life sciences segment down. Internet-related deals were off too, but $807 million went into 158 deals so there were some happy geeks last quarter despite the otherwise gloomy financial situation.

Interestingly, the percentage of venture and angel funds investing in seed stage companies increased 40% from 2009 based on the second annual survey of its members by The National Association of Seed and Venture Funds (NASVF) and the Temple University Fox School of Business.

Most of the funds were small, with less than $20 million under management, and their average investments were between $500,000 and $1,000,000. Most (85%) invested in knowledge-based ventures such as technology, software, Internet, science and communications.

In case your eyes are starting to glaze over with all the statistics and big numbers, here's an eye opener: Chubby Brain. Now there's a company name that's, um…different. They use a "proprietary sourcing method" to keep an eye on high-value private companies that are funded by anything from angel investors to government grants and VC firms — even under-the-radar mid-market private companies, they say.

CB Insights, as Cubby Brain is now called, mirrors the findings of the MoneyTree and NASVF reporting — the strongest deal activity in 1.5 years and a jump in green investments. They also note that New York and Massachusetts seem to be gaining on California as those state's share of venture dollars has increased while California's have declined. Nevertheless, the left coast giant still garnered almost half of all first quarter 2010 venture dollars and just over 40% of the deals. In fact, 52% of all Internet deals were made with California companies, mostly in Silicon Valley, where seed stage deals average $750,000. Let's hope The Big One doesn't happen any time soon.

So if you're an entrepreneur with a company that can promise a 30-50% return on investment in five years and you have an iron-clad exit strategy, hoist a genetically-engineered beer to your obviously effective chubby brain, and dream of driving your very own Fisker. It ain't your father's Oldsmobile, but then the future ain't what it used to be.