VC funding hits 10-year high, though mid-stage startups suffered

Total venture funding in the fourth quarter hit $7.6B, part of a banner year in which overall investments totaled $30.6B.

The CB Insights look at 10-year venture capital investments.
CB Insights looks at a decade of venture capital investments. CB Insights

Venture capital funding was up last year to a 10-year high . So is it a bubble? And if so, is it still expanding or ready to burst? Read on.

During the fourth quarter of 2011, venture capitalists spent $7.6 billion investing in companies around the world, according to venture capital database CB Insights. All told, investors offered up $30.6 billion last year in over 3,000 deals, making it the biggest investment year in a decade. In 2010, venture capitalists plunked $23.7 billion into nearly 2,800 deals.

Investors dropped $2.5 billion into online companies last quarter, down from the nearly $3 billion they spent in the third quarter. A total of $10.5 billion was invested in Web companies last year.

Not all entrepreneurs could drink from that firehose, though. Early-stage funding was up, but the going was rougher in mid-stage rounds--technically, series B and C. In the fourth quarter, just 32 percent of all deals occurred in series B or C rounds. First round fundings. meanwhile, accounted for 35 percent of all deals made last quarter.

"The reality is that VC funding is a funnel," CB Insights wrote in its report on last year's funding. "More companies get Series A than B than C--etc. Within tech, our data shows the VC funnel has gotten fat at the top (a lot of Series A and Seed deals)."

But what happens after that? As CB Insights points out, "not all of these companies can or should receive Series B [or] C" funding. And when they don't, the firms hit what's known as a "chokepoint" that will typically result in closure, a business downturn, or, for the lucky few, an acquisition.

The so-called series B and C crunch has been a hot topic in Silicon Valley for months now. Back in October, the WSJ made waves when it argued that startups are having more trouble raising cash now than they were not long ago. The publication used AngelList, a site that lets nascent companies ask VCs for capital, to argue its point. According to the site's operator, Naval Ravikant, out of 50 to 100 startups that ask for cash, just "one to two are getting financing."

Soon after the Journal published its piece, venture capitalists flocked to Twitter (and elsewhere) to knock it down, saying there's been no overall cash crunch across the VC landscape. Such investors did, however, acknowledge that funding was starting to dry up for companies seeking second and third funding rounds.

"Increased incubator, seed deal volume is sustainable," Well-known entrepreneur Dave McClure tweeted at the time. "High-valuation Series B/C (financing) is not sustainable."

For venture capitalists, investing in early-stage companies is typically cheaper, and thus lower risk. Yet several online companies have been getting some awfully rich valuations as they mature, which makes them less desirable from a VC-investing perspective. I.e., it's much harder to buy low and sell high under these circumstances.

Still, some companies continue to buck the odds. TaskRabbit, a company that lets people outsource errands, last month announced that it had raised $17.8 million in a second funding round. A few months before that, online doctor and dentist booking service ZocDoc raised $50 million in a series C round . It raised an additional $25 million from Goldman Sachs. What's more, according to CB Insights, 31 percent of all investment dollars last quarter went to series B and C rounds.

In other words, venture capitalists aren't unwilling to drop cash into later-stage companies; they're just trying to be more selective in how they go about it. Which certainly argues against the notion of a venture-funding bubble. But stay tuned.

Other Key Findings From the CB Insights Report:

  • California and Massachusetts were the first and second states, respectively, in terms of total VC deals last quarter. California-based firms engaged in 40 percent of all deals, while Massachusetts-based firms were involved in 12 percent of all deals.
  • Venture capital deals on green technology were about even between the third quarter and fourth. A total of 69 "green" deals were struck and $1.3 billion of investment changed hands.
  • Although New York came in second place during the third quarter in total deals volume, it dropped back down to third place last quarter.
 

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