How Venture Capital Deals Have Changed Since the Great Recession

Scott Shane, Ph.D.

Here’s a bit of bad news for entrepreneurs seeking to finance high potential startups. Venture capitalists are doing fewer deals and investing less money than they did before the financial crisis and the Great Recession. According to data from Price Waterhouse Coopers and the National Venture Capital Association, the number of venture capital deals shrank from 4,211 in 2007 to 3,698 in 2012.

The amount that venture capitalists put into companies is also down substantially. Measured in inflation-adjusted terms, in 2012 venture capitalists only invested 75 percent of the amount they did in 2007.

Deals are also smaller than they were before the Great Recession. In real dollar terms, the average deal size declined from $8.4 million in 2007 to $7.2 million in 2012.

For entrepreneurs looking for a first time investment, the numbers are also discouraging. In 2012, VC’s made 1,163 “first sequence” deals, down from 1,418 in 2007, a decline of 18 percent.

The amount invested dropped even more. In inflation-adjusted terms, VC’s put a whopping 52 percent less into first time deals in 2012 than in 2007.

The average deal also has been shrinking since the Great Recession, as the figure above shows. In inflation-adjusted terms, the average 2012 first investment was only 59 percent the size of the average 2007 initial investment.

The shrinkage in “first sequence” deals has occurred across all investment stages, with the decline in the inflation-adjusted amount invested heaviest in the seed and expansion stages. For number of deals, the decline was present for all stages, except for the early stage.

First sequence deals have become more focused at the early stage. In 2012, early stage deals accounting for 51 percent of all first sequence venture capital funding, up from 38 percent in 2007. The number of early stage deals increased from 42 to 65 percent of the total.

However, the shift in the investment stage wasn’t towards younger companies. Both in terms of the amount invested and the number of deals, the growth in early stage financing came at the expense of declines in both seed stage deals and expansion stage deals (the stages before and after the early stage.)

First published in Small Business Trends, Finance section, March 18, 2013.

SCOTT SHANE has written extensively about entrepreneurship and innovation. His book Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live by (Yale University Press, 2008) was one of the top ten business books of the year for His 2005 book Finding Fertile Ground: Identifying Extraordinary Opportunities for New Businesses won the 2006 Golden Book Award for best business book of the year and has been translated into eight languages.

The author of numerous scholarly articles and books about many aspects of entrepreneurship, Shane was the 2009 winner of the Global Award for Entrepreneurship Research, the most prestigious award in this academic field. Shane has also written extensively for popular audiences, currently penning regular columns for the Business Week and Entrepreneur small business websites. He has been a frequent commentator on television programs, appearing on CNN and Fox Business, and he has been a guest on dozens of radio talk shows across the globe.

After faculty stints at the University of Maryland, Massachusetts Institute of Technology, and Georgia Institute of Technology, Shane is currently the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University and a visiting scholar at the Federal Reserve Bank of Cleveland.

Shane received his A.B. at Brown University and his PhD in applied economics from the Wharton School of the University of Pennsylvania. Born in 1964, he lives in Shaker Heights, Ohio, where, in addition to his academic position, he is an active angel investor with the Northcoast Angel Fund.

Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances, and reflects personal views of the authors and not necessarily those of their firm or any of its clients. For legal advice, please consult your personal lawyer or other appropriate professional. Reproduced with permission from Small Business Trends. This work reflects the law at the time of writing in March 2013.