The importance of entrepreneurs and start-ups has been increasingly emphasized in response to rising unemployment rates following the financial crisis. Seen as providing much needed stimulation and competition in lagging economies, regulatory systems have been simplified over the years in order to encourage entrepreneurs to take the leap in starting up their own business. The rise of crowdfunding platforms has had a marked impact on the way in which start-ups approach funding, but at the same time, traditional venture capital remains a key source of finance for young companies. Preqin recently published a blog on the developments of the UK venture capital scene and as a follow up, this blog will explore the changes that have taken place in the early-stage venture capital scene between 2009 and 2014.
According to Preqin’s Funds in Market online service there are currently 2,183 private equity funds on the road, with 13% of these marketed as early stage venture capital vehicles seeking an aggregate $19.6bn in commitments. In comparison, 1,620 funds were in market in August 2009 but only 7% of these were early stage venture capital opportunities. The rise in early stage opportunities could be attributed to an increased appetite for risk from investors, though this is only one of a multitude of possible explanations. It is interesting to note however, that while the percentage of early stage funds has increased since 2009, the average target size for each fund has dropped dramatically. In 2009, the average early stage venture capital fund was targeting $161mn, whereas the corresponding figure in 2014 is only $80mn.
Early stage funds are also demonstrating different preferences: while 80% of funds in 2009 were targeting opportunities in the US and Europe, this number has dropped to 75% in 2014. Furthermore, there has been a definite increase in the number of early stage funds targeting the technology industry, with 48% of early stage funds in 2014 expressing an interest in this sector compared with just 34% in 2009. The software industry has also seen an increase in interest with 36% of early stage funds targeting this sector in 2014, up from 25% in 2009.
With the landscape of start-up and early stage funding changing in response to new legislation such as the JOBS Act, early stage venture capital funds are having to adapt the way they conduct business; smaller private equity firms, such as US-based 500 Startups, have used provisions under the aforementioned Act to engage in general solicitation, engaging with potential investors over social media and other alternative routes. While traditional fundraising remains popular among larger private equity firms, it will be interesting to look at how the early stage venture capital scene adapts to new developments.