WI VC Investment: Down (& Out?) in Q3 ’13

The venture capital investment numbers are out for the Q3 2013 (courtesy of NVCA & PwC). I am usually not particularly interested in the quarterly fluctuations but the Wisconsin numbers caught my eye, particularly relative to the national data.

National VC Environment

The national data across industries puts investment from Q1 to Q3 in 2013 at $20.7B, which compares favorably to 2012 annual total of $27.1B. The annual trends for 2011-2013 are similar to the data for the first three quarters.

According to PWC:

When compared to the first three quarters of 2012, both the dollar and deal totals for the first three quarters of 2013 track slightly higher, however the dollar and deal totals for the first three quarters of 2011 exceed those of 2013.

Wisconsin VC Environment

Wisconsin companies received $31.2 million in VC investments in the first three quarters of 2013, strongly suggesting that Wisconsin VC investment will be down substantially for the year. In order to meet the same VC investment level as 2012, Wisconsin companies would need to close more than $60M in Q4 2013.

To explore the likelihood of making up that difference, the last few years of first to third quarter investments are provided, as above. These numbers show that the dollars invested are significantly lower than previous years. Since 2010, the first three quarters represents ~50-90% of the annual VC investment in the state. For 2013, the $31.2M invested is about one third of the $95.3M total for 2012.

What is the likelihood of a breakout quarter to make up the difference? From 2002 through 2012 (44 quarters), there have been five quarters where the investment represented >50% of the annual investment in that quarter. An additional six quarters were over 40% of the annual total. Historical numbers suggest there is not a break out quarter on the horizon.

What May Be Behind a Change?

More Deals, Fewer $

Compare the number of deals in the table above with the first three quarters vs. annual investment. Although there is only $31.2M invested this year, there are 13 deals, which is similar to the annual number of deals in 2011 and 2012.

Another way to look at this issue is that the last three years had a large portion of dollars invested in a small number of deals.

• 2010: Cellular Dynamics and Virent for total ~$87M
• 2011: Networked Insights, Shine and Cellular Dynamics raised a total of ~$61M
• 2012: Five companies raised a total of ~$107M (This number was pulled from company announcements and is higher than the PwC total for 2012.)

Growth Cycle of Businesses

Over the last three years, Madison-based Cellular Dynamics raised almost $92M (2010, 2011, 2012). Now that the company has gone public, what is the next Wisconsin-based company with sufficient growth potential to support that level of capital commitment?

Deals Not Yet Added to the Database

The PwC numbers are updated each quarter and there are occasional adjustments to prior quarters. However, the updates are generally relatively minor, suggesting a Q3 update won’t change the issue.

Looking to 2014 and Beyond in Wisconsin

Wisconsin has seen some positive developments in the availability of venture capital going forward. Wisconsin Alumni Research Foundation (WARF) and the State of Wisconsin Investment Board (SWIB) launched a $30M fund called 4490 Ventures. Great Oaks Venture Capital has committed to investing $500,000 over next three years in early stage companies that come out of UW-Madison. This program expands their presence beyond existing investments in EatStreet, Murfie, StudyBlue and Nextt. The state of Wisconsin has committed $25M to a fund of funds. The primary venture capital firm in WI, Venture Investors, closed a new $80M fund. The firm’s previous fund of $115M was in 2007, which came when they opened an office in Ann Arbor. Of six investments from the new fund, two (Nextt and Madison Vaccines) have been in Madison.

While positive, none of these developments will substantially move the needle towards $90M+ of annual venture capital investment in Wisconsin. Change will come with the success of the small investments to bring in the next round from the coasts and ultimately to provide an exit for investors.

Of note is the difference in fortune between tech and life sciences in the recent WI developments. 4490 Ventures and Great Oaks VC are tech focused efforts and the state fund of funds is developing with restrictions on types of life science investments. In local meetings, Venture Investors, which has historically invested heavily in life sciences, has indicated they are aiming for a more balanced portfolio of life science and tech investment. Perhaps these developments are an opportunity well masked as a challenge for Wisconsin life science companies.

 

 

Update 11/5/13 12:20 PM: Another Wisconsin funding development this year was the creation of BrightStar Wisconsin, a nonprofit investment capital group to make investments in Wisconsin-based companies. BrightStar launched with $6M in commitments and a goal to bring in another $60M over three years.