Venture Capital: The Times, They Are A-Changin'
The VC environment isn't what it used to be. Guess what? That's not a bad thing. The venture environment has evolved and understanding three key trends in that evolution can be critical to getting your company funded.
First, VC isn't strictly about start-up companies anymore. Funding data reveals that more companies get VC investments at the revenue generation stage and profitable stages than at the start up or product development stage. Investee companies are being supported by VCs longer, too, well into revenue generation and profitability. Why? It's vastly cheaper to start a business today than it was 10 or 20 years ago, giving angel investors the ability to play a larger role today in getting companies off the ground. VC dollars are more frequently used to scale – not start – a business.
Second, corporate VC is here to stay. During the internet boom, a large influx of corporate venture firms dove into the mix, but retreated when the bubble burst. That was then, this is now. Corporate VC made its way back in the early 2000s and even the recent recession didn't cause a pullback. In fact, almost a quarter of all VC backed companies since 2003 have had a corporate investor in their cap table.
Finally, and perhaps most surprising, taking corporate venture capital rarely means the company will acquire the investee company. EY research showed that over the last six years, when a corporate VC-backed company was acquired, an existing corporate investor was the buyer just 2 percent of the time. From an investee perspective, it's clear that if you take corporate venture capital it won't lock you into selling to the corporate investor when it's time to exit.
Speaking of exits, one thing hasn't changed: a healthy exit environment is needed to for the entire ecosystem to work. We're now seeing strong IPOs driving some VC returns. The more VC returns increase, the more capital will be available for the next great generation of interesting companies with great ideas.
Jeff Grabow leads the Venture Capital efforts of Ernst & Young LLP (www.ey.com) on the West coast. Views expressed are those of the author and do not necessarily reflect the views of Ernst & Young LLP.