Yesterday’s post drew a fair amount of questions about the decline in the median investment by VCs over time. I’ve put together some more charts to explain the story in greater depth.
Investments by Stage Relatively Constant
Earlier stage investments generally require less capital. A broad shift toward early investments, therefore, would decrease the investment medium. The chart below, depicting the number of investments by stage, normalized, shows this isn’t the case. In fact, as total investment declined over the past 18 months, later stage financings were more popular because VCs needed to complete follow on financings of portfolio companies.
Significant Investment Sector Shifts
VCs could be shifting dollars to less capital intensive industries, causing the decline in median investment size. The data illustrates this point: VCs are shifting to more capital efficient deals. Infrastructure investments (networking, semiconductors) are capital intensive industries. Over the past 7 years, investments in this sector, in pink, has dropped by one third, while web investments, in orange, have grown dramatically.
Examining the total dollars in per sector, we see that though web companies constitute about 20% of the number of investments, only 10% of the dollars are invested there.
Web Investments are Capital Efficient
It costs far less to start a web company today than it did five years ago. Given the small barrier to entry, potentially large exits and the amount of venture financing available, we should continue to see growth in web investing over the next several years.