Growth Strategies

Company Size More Important to VCs

In the third quarter of this year, half of all venture financing went to larger, later-stage companies, compared with 33 percent for the same perio...
Stephen TaubNovember 9, 2005

Venture capitalists are increasingly investing in larger, more-established companies, according to data published by the National Venture Capital Association and reported by the The Wall Street Journal.

In the third quarter of this year, half of all venture financing went to bigger, later-stage companies, the trade group found, compared with 33 percent for the same period last year and 15.5 percent five years ago. The association defines later-stage companies as those with a widely available product generating continuing revenue, noted the Journal.

Financing of seed-stage and early-stage companies reportedly accounted for just under 19 percent in the third quarter, down from 22.4 percent last year and 27.4 percent at the end of 2000.

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In the third quarter, the average investment in a later-stage company was about $10.6 million, up from $10.1 million a year ago. By contrast, the trade group reportedly found that seed-stage companies fetched a little less than $2 million on average; early-stage companies, which are slightly more developed, reportedly received an average $5.4 million each.

Of course, five years ago was the height of the dot-com boom, when investors were willing to plunk down money on a dream and a song. One reason venture funds are investing in larger companies, noted the Journal, is that the usual lifespan of these funds is ten years, and many of these funds — which pulled in billions of dollars during the roaring ’90s — are eager to find suitable investments before they run out of time.

There is “real pressure at the large funds to get the rest of [this] capital put to work,” Michael Greeley, a partner at IDG Ventures in Boston, told the paper. On the other hand, Draper Fisher Jurvetson managing director John Fisher told the paper that “we invest only when we can achieve superior returns on investment.”

The Journal also observed that larger, more established firms are presumably closer to going public or being acquired, providing the venture firms a profitable exit from their investment.

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