Corporations Embrace Venture Capital

With Traditional R&D Yielding Diminishing Returns, a Growing Number of Companies Are Turning to Venturing for Game-Changing Ideas as Well as Financial Gains, According to a New Report by The Boston Consulting Group

Corporate venture capital (CVC) investing is back in style, and this time it's here to stay. A host of new industries are rushing to join the game, and CVC veterans and newcomers alike are forming cross-industry networks to fund promising start-ups, according to a new report by The Boston Consulting Group (BCG), "Corporate Venture Capital: Avoid the Risk, Miss the Rewards."

Corporate venture activity has accelerated in recent years, the report says. Once almost exclusively the stronghold of innovation-intensive industries such as technology, pharmaceutical, telecommunications, and media and publishing, CVC is being embraced by industries that once shunned the activity. Senior executives in several industries have told BCG that they regard venturing as an indispensable tool for innovation and development -- an assertion borne out by comparing their internal R&D spending with their venture investing. Across the board, corporate R&D spending as a percentage of sales is declining even as companies intensify their venture activities.

"Venture investing is, of course, an inherently risky activity," said Alexander Roos, a BCG partner and coauthor of the report. "But considering the disruptive potential of the innovations emerging from start-ups, the greater risk is not to invest at all."

Since the 1960s, CVC has cycled through three distinct boom-and-bust periods, with the bust coming each time as a result of financial-market or macroeconomic downturns. Now a fourth growth phase is under way, leading some observers to suggest that history is repeating itself. BCG argues otherwise, citing compelling evidence that CVC, once an experiment, has entered a new, more mature phase. Not only are new industries entering the arena, but the life spans of corporate venture units have increased steadily in the past ten years. For example, the length of time that CVC units in the pharmaceutical industry have been in continuous existence increased by 50 percent from 2002 to 2012, while the average lifetime of consumer industry CVC units has lengthened to 4.9 years in 2012 from 1.5 in 2002.

What's more, corporate venture investing has spread geographically beyond the U.S. and Europe to vibrant, fast-growing emerging markets. In the first half of 2012, for example, the dollar value of consumer industry venture investments in China rose 18 percentage points, to 63 percent, from the second half of 2010, while U.S.-focused investments shrank by 14 percentage points, to 20 percent.

The report takes a comprehensive view of the CVC landscape, analyzing the industries and companies engaging in venture investing as well as the industries and regions where they are focusing their capital.

New Players Are Joining the Game

Today, more than 750 corporations around the world have CVC units in operation, according to the report, citing the definitive database of Global Corporate Venturing, a leading industry publication. Between July 2010 and June 2012, these corporations engaged in more than 1,300 transactions. Analysis of the data reveals that corporations and industries with a long history of venturing are stepping up their presence in the field, while sectors that went largely unrepresented in earlier decades are also entering the arena. To gain a sense of the evolution of corporate venturing, BCG compared the venturing activities of four of the traditional industries (technology, pharmaceutical, telecommunications, and media and publishing) with those of four relative newcomers (machinery, power and gas production, consumer, and construction).

The Pressure to Innovate Is Fueling the Surge

The comparison shows that venture investing is taking root across a broad range of industries. Within the traditional sectors, the percentage of the 30 largest companies with dedicated CVC units has been climbing steadily since at least 2007. In three of four sectors (pharmaceutical, telecommunications, and technology) more than half of the 30 largest companies have such units in place -- a sign of the growing recognition of CVC's value as a tool for innovation, corporate development, and competitive advantage.

The same pattern holds, on a smaller scale, in those industries that have traditionally been less reliant on pure innovation to drive growth. "In recent years, these industries have come under growing pressure to innovate in response to demands for cleaner technology, more sustainable operations, and an improved user experience," said Dinesh Khanna, a BCG partner and coauthor of the report. "As a result, they are looking past internal R&D toward other innovation channels." Starting from a very low level, CVC concentration in all four newcomer industries in the comparison increased markedly from 2007 to 2012.

The Search for Disruptive Technologies Is On

As CVC expands beyond its traditional strongholds, the investment focus is widening as well. Corporate investors are looking beyond their core businesses toward sectors such as clean technology, which has the potential to disrupt industries ranging from power generation to building materials to transportation. Industrial companies, for example, are spreading their investments widely but maintaining a focus on related sectors; they invested in clean technology (the target of more than half of industrial CVC investment), information technology, health care, and transportation. CVC units in the chemical sector, meanwhile, diversified away from the core toward targets in the clean technology, health care, and industrial sectors, where they are seeking, for example, to exploit the potential for biochemical processes to supplant petrochemical ones. Overall, the most popular investment targets, measured by total number of transactions, were in IT, health care, media and publishing, and clean technology.

In addition to seeking opportunities outside their industry, corporate investors are deploying their capital outside the U.S. The data reveal that while the geographical investment focus varies widely by industry, corporate investors in most sectors are, in one fashion or another, directing much of their capital toward emerging markets. CVC investors are also increasingly willing to co-invest with other companies.

One of the most active networkers is General Electric. In clean technology, for example, GE is partnering with 13 corporate investors, 7 of them representing other industrial sectors. It is connected with Google through the two companies' investments in CoolPlanetBioFuels, for instance, and with Asahi Glass through common investments in Envia Systems.

The Old Rules Still Apply

The most successful CVC units are guided by distinct ground rules that dictate how those units define both their operating principles and their strategy, how knowledge is captured and transferred, how corporate assets are leveraged, and how venturing teams are staffed:

*Operating Principles. Leading CVC units have clearly defined investing parameters. Corporate leadership has committed to venturing for the long term, with the understanding that venture investors, by definition, take risks and that the occasional failure is the cost of doing business.

*Strategy. Befitting their key role in the innovation management effort, successful CVC units are tightly aligned with their corporate parents' overall business and innovation strategies.

*Knowledge Transfer. Companies with high-performing venture units often designate specific business units to serve as "guardians" of individual investment targets. "The guardians are responsible for ensuring that the knowledge gathered from target investments feeds directly and reliably into the larger corporation-wide innovation pipeline," said Michael Brigl, a BCG principal and coauthor of the report.

*Leverage of Existing Assets. Successful CVC units also make the most of their corporate resources. Some corporations, for example, give researchers from target companies access to their laboratories, while others contribute manufacturing expertise, offer broader distribution of the target company's products, or provide administrative support for patent applications.

*Staffing. Finally, proven venturing performers pay close attention to staffing issues, choosing team leaders who combine broad familiarity with the VC landscape with deep understanding of the corporation's strategy and processes.

VENTURE-BACKED IPO VOLUME FLAT IN THIRD QUARTER OF 2012

Technology M&A Exits Boosts Q3 Value As Volume Slips Venture-backed initial public offerings (IPOs) raised $1.1 billion from 10 offerings during the third quarter of 2012, experiencing a slight decline in volume from the second quarter of this year but more than doubling activity seen during the third quarter of 2011. Total IPO value also increased from the third quarter of 2011 while falling well short of the second quarter 2012 value due to the record-breaking offering from Facebook in May. For the third quarter of 2012, 96 venture-backed M&A deals were reported, 30 which had an aggregate deal value of $7.6 billion, a 30 percent increase from the second quarter of 2012, according to the Exit Poll report by Thomson Reuters and the National Venture Capital Association (NVCA). “While the 2012 year-to-date IPO volume is in line with last year, the similarities are not particularly welcome,” said Mark Heesen, president of the NVCA. “Once again we are dealing with major uncertainty regarding how the Administration and the Congress will deal with the impending fiscal cliff, a wild card that could continue to impact IPOs this Fall. Further, we could see this environment slow acquisitions as well, with corporate acquirers waiting for the election outcomes and more stability to buy those companies that will advance their innovation strategies. These exit numbers should put Washington policymakers on notice that they must come together on these pressing fiscal matters to give businesses and the markets the confidence needed to move forward.” IPO Activity Overview There were 10 venture-backed IPOs valued at $1.1 billion in the third quarter of 2012. By number of deals, quarterly volume fell 9 percent from the second quarter of this year but more than doubled the value registered during the third quarter of 2011. Six of the 10 IPOs of the quarter were IT-related IPOs representing 60 percent of the total issues for in the quarter. By location, all of the quarter’s 10 IPOs were by U.S.-based companies with six coming from the state of California. In the largest IPO of the quarter, Palo Alto Networks (PANW), a Santa Clara, California-based network security company, raised $260 million and began trading on the New York Stock Exchange on July 19th. For the third quarter of 2012, seven companies listed on the NASDAQ stock exchange and three companies listed on the New York Stock Exchange. Nine of the 10 companies brought to market this quarter are currently trading above their offering price. There are 28 venture-backed companies currently filed publicly for IPO with the SEC. This figure does not include confidential registrations filed under the JOBS Act. Mergers and Acquisitions Overview As of September 30th, 96 venture-backed M&A deals were reported for the third quarter of 2012, 30 of which had an aggregate deal value of $7.6 billion. The average disclosed deal value was $253.3 million, a 26 percent increase from the second quarter of 2012. The information technology sector led the venture-backed M&A landscape with 70 of the 96 deals of the quarter and had a disclosed total dollar value of $5.6 billion. Within this sector, Computer Software and Services and Internet Specific deals accounted for the bulk of the targets each with 29 transactions across these sector subsets. Three billion-dollar venture-backed M&A deals were completed during the third quarter of 2012, led by VMWare’s $1.26 billion purchase of Nicira Networks, Microsoft’s $1.2 billion bid for Yammer Inc and Facebook’s $1.0 billion offer for Instragram, Inc. Deals bringing in the top returns, those with disclosed values greater than four times the venture investment, accounted for 52 percent of the total disclosed transactions during third quarter of 2012, on par with the second quarter of this year. Venture-backed M&A deals returning less than the amount invested accounted for 22 percent of the quarterly total.

VENTURE CAPITAL FUNDS RAISED $5.0 BILLION DURING Q3’12

Number of Funds Increased 23 Percent Compared to Second Quarter

Fifty-three U.S. venture capital funds raised $5.0 billion in the third quarter of 2012, according to Thomson Reuters and the National Venture Capital Association (NVCA). This level marks a 17 percent decrease by dollar commitments and a 23 percent increase by number of funds compared to the second quarter of 2012, which saw 43 funds raise $6.0 billion during the period. The top five venture capital funds accounted for 55 percent of total fundraising this quarter, compared to 80 percent during the second quarter of 2012. Venture capital fundraising for the first nine months of 2012 totaled $16.2 billion, a 31 percent increase by dollar commitments compared to the first nine months of 2011 ($12.4 billion) despite a 13 percent decline by number of funds.

““While the dollars raised this quarter fell from Q2, we were encouraged by the increase in the number of firms who were successful in raising venture funds,” said Mark Heesen, president of the NVCA. “For the last several years we have watched carefully the consolidation of dollars into the hands of fewer firms. While more than half of the dollars raised this quarter were placed in five funds, it was less concentrated than previous quarters and allows for the disbursement of capital across a more diverse base of funds. We are hopeful that this uptick is not an anomaly, but demonstrates greater confidence by our limited partners in the asset class as a whole.”

There were 37 follow-on funds and 16 new funds raised in the third quarter of 2012, a ratio of 2.3-to-1 of follow-on to new funds. The largest new fund reporting commitments during the third quarter of 2012 was from San Francisco, California-based Forerunner Partners I, L.P., which raised $41.7 million for the firm’s inaugural fund. A “new” fund is defined as the first fund at a newly established firm, although the general partners of that firm may have previous experience investing in venture capital.

Third quarter 2012 venture capital fundraising was lead by Menlo Park, California-based Sequoia Capital U.S. Growth Fund V, L.P. which raised $950 million and GGV Capital IV, L.P. and New Enterprise Associates 14, L.P., which raised $565 million and $524 million, respectively.

VENTURE CAPITAL INVESTMENTS DECLINE IN DOLLARS AND DEAL VOLUME IN Q3 2012

Technology Investing Remains Solid as Life Sciences and Clean Tech Continue to Adjust to Market Conditions

Venture capitalists invested $6.5 billion in 890 deals in the third quarter of 2012, according to the MoneyTree™ Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters. Quarterly venture capital (VC) investment activity declined 11 percent in terms of dollars and five percent in the number of deals compared to the second quarter of 2012 when $7.3 billion was invested in 935 deals.

Investment for the first three quarters of the year was $20 billion into 2,661 deals, a level well below this point last year, making it likely that 2012 will fall short of 2011 in terms of both dollars and deal volume.

"The decline in funding for Seed/Early stage companies is firmly in place - we've seen a drop in dollars and deals both quarter-over-quarter and year-over-year," remarked Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC US. "We're seeing fewer new venture funds being raised which means less capital is available for new investments. And, we're seeing venture capitalists be very cautious with the capital that is available due to the lack of a significant number of liquidity events. Instead, venture capitalists are continuing to support the companies already in their portfolio."

“The third quarter numbers tell a story consistent with investment themes we have been seeing throughout 2012,” said Mark Heesen, NVCA president. “Information technology investment continues to be very strong, particularly in the Internet arena while life sciences investment remains low, reflecting ongoing concerns regarding regulatory uncertainty, capital intensity and investment time horizons in the space. We also continue to see clean tech investment shifting concentration to smaller, more capital efficient deals. Opportunities continue to abound in each of these sectors, but lower venture fundraising levels will push investment dollars down as the industry recognizes it cannot put out more money than it takes in.”

Industry Analysis

The Software industry received the highest level of funding for all industries with $2.1 billion invested into 304 deals during Q3, marking the fourth quarter in the last five in which investment in Software exceeded two billion dollars. This level of investment represents a 12 percent decline in dollars and a one percent increase in deal volume from the second quarter when $2.4 billion was invested in 300 deals.

Life Sciences (Biotechnology and Medical Devices) investing increased in terms of dollars but declined in deal volume for the third quarter of 2012 with $1.7 billion going into 181 deals, comprising 26 percent of VC dollars invested. Investment in Biotechnology increased by 64 percent in terms of dollars and 22 percent in terms of deals with $1.2 billion going into 116 companies in Q3. This increase is driven by a number of larger, follow-on rounds in the third quarter compared to Q2 when just $755 million went into 95 companies. Medical Device investing declined for the third consecutive quarter, falling 37 percent in dollars and 27 percent in deal volume with $434 million going into 65 companies, experiencing the lowest dollar level of investment since 2004. Overall, Life Sciences investment for the first three quarters of 2012 is down 19 percent in dollars and 12 percent in deals from the same time period in 2011.

Internet-specific investing fell 12 percent in dollars and eight percent in deals from the previous quarter with $1.7 billion going into 250 deals but remained well above the billion dollars per quarter level that has been prevalent for the last two years. Additionally six of the top 10 deals for the quarter were in the Internet-specific category. 'Internet-specific’ is a discrete classification assigned to a company with a business model that is fundamentally dependent on the Internet, regardless of the company’s primary industry category.

The Clean Technology sector, which crosses traditional MoneyTree industries and comprises alternative energy, pollution and recycling, power supplies and conservation, also saw a 20 percent decrease in dollars but a two percent increase in deal volume with $791 million going into 58 deals during the third quarter compared to $991 million going into 57 deals in the second quarter. The dollar decrease in Q3 occurred despite the fact that three of the top ten deals fell into the Clean Tech category, suggesting most of the remaining deals of the quarter were comprised of smaller rounds.

Seven of the 17 MoneyTree sectors experienced increases in dollars invested in the third quarter, including Financial Services, Healthcare Services, Business Products and Services and Retailing.

A total of 10 of the MoneyTree sectors showed a decline in Q3 including Media and Entertainment, Semiconductors, Telecommunications and IT Services.

Stage of Development

Venture investment declined across all stages of development in both dollars and deals in the third quarter of 2012.

Seed stage investments fell 22 percent in dollars and seven percent in deals with $178 million invested into 67 deals in the third quarter. Early stage investments also declined, falling 21 percent in dollars and seven percent in deals with $1.7 billion going into 395 deals. Seed/Early stage deals accounted for 52 percent of total deal volume in Q3, compared to 53 percent in the second quarter of 2012. The average Seed deal in the third quarter was $2.7 million, down from $3.2 million in Q2. The average Early stage deal was $4.4 million in Q3, down from $5.2 million in the prior quarter.

Expansion stage investment decreased just three percent in dollars and one percent in deals in the third quarter, with $2.6 billion going into 241 deals. Overall, Expansion stage deals accounted for 27 percent of venture deals in the third quarter, and the average Expansion stage deal was $10.8 million, down from $11.1 million in the prior quarter.

Investments in Later stage deals decreased 10 percent in dollars and four percent in deals to $2.0 billion going into 187 rounds in the third quarter. Later stage deals accounted for 21 percent of total deal volume in Q3, similar to Q2 when $2.2 billion went into 195 deals. The average Later stage deal in the third quarter was $10.5 million, which is a slight decline from $11.2 million in the prior quarter.

First-Time Financings

First-time financing (companies receiving venture capital for the first time) dollars declined eight percent in dollars to $1.0 billion in Q3, but the number of deals increased one percent to 297 deals in the third quarter. First-time financings accounted for 16 percent of all dollars and 33 percent of all deals in the third quarter, compared to 15 percent of all dollars and 32 percent of all deals in the second quarter of 2012.

Companies in the Software, Media & Entertainment, and IT services industries received the most first-time rounds in the third quarter. The Biotechnology sector experienced a continued drop in first-time deal volume to just 15 rounds in the third quarter while Medical Device first time financings remained low at 17 rounds. The average first-time deal in the third quarter was $3.4 million, down slightly from $3.7 million in the prior quarter. Seed/Early stage companies received the bulk of first-time investments, garnering 82 percent of the deals.

MoneyTree Report results are available online at www.pwcmoneytree.com and www.nvca.org.

Berkery Noyes: Education Industry - 3rd Qtr Trends Report

Complete report

Q3 2012 KEY HIGHLIGHTS

• The most active acquirer through Q3 2012 was Pearson plc with four transactions, two of which occurred during Q3 2012: PT Efficient English Services and Psychological Software Solutions, Inc.
• The largest transaction in Q3 2012 was Levine Leichtman Capital Partners Inc.'s acquisition of MPW, a portfolio company of Apollo Group, Inc., for $85 million.

Q3 2012 KEY TRENDS

• Total transaction volume in Q3 2012 increased by two percent over Q2 2012, from 58 to 59.
• Total transaction value in Q3 2012 decreased by 39 percent over Q2 2012, from $740.0 million to $454.8 million.

MULTIPLES & VALUE TRENDS

• The median revenue multiple from 2011 through the 1st 3 Quarters of 2012 fell by 13 percent, from 1.6x to 1.4x.
• The median EBITDA multiple from 2011 through the 1st 3 Quarters of 2012 increased by 13 percent, from 12.0x to 13.5x.
• Professional Training Technology from 2011 through the 1st 3 Quarters of 2012 had a median revenue multiple of 2.2x.

TOP TEN DEALS THROUGH Q3 2012

The top ten deals by value have seen two new additions since our half year report, both of which were completed by private equity firms: Levine Leichtman Capital Partners Inc.'s acquisition of MPW and Sovereign Capital Partners LLP's acquisition of three sixth form colleges in Central London.

These two transactions, with an aggregate value of $134 million, represented six percent of transaction value in the 1st 3 Quarters of 2012 and 29 percent of Q3 2012 transaction value.

Berkery Noyes: Health Care Industry - 3rd Qtr Trends Report

Complete report

Q3 2012 KEY HIGHLIGHTS

• The largest transaction through Q3 2012 was Roper Industries, Inc.'s acquisition of Sunquest Information Systems, Inc., a portfolio of Vista Equity Partners, for $1.4 billion.
• The most active acquirer year-to-date was IMS Health Incorporated with five transactions, two of which occurred during Q3 2012: TTC LLC and PharmaDeals Ltd.

Q3 2012 KEY TRENDS

• Total transaction volume in Q3 2012 decreased by seven percent over Q2 2012, from 96 to 89.
• Total transaction value in Q3 2012 fell by seven percent over Q2 2012, from $4.2 billion to $3.9 billion.

MULTIPLES & VALUE TRENDS

• The median revenue multiple from 2011 through the 1st 3 Quarters of 2012 increased by 17 percent, from 1.8x to 2.1x.
• The median EBITDA multiple from 2011 through the 1st 3 Quarters of 2012 increased by six percent, from 9.9x to 10.5x.
• One Equity Partners' acquisition of M*Modal represented a 2.3x revenue multiple and 9.6x EBITDA multiple.

TOP TEN DEALS THROUGH Q3 2012

The top ten deals by value have seen three new additions since our half year report: Roper Industries, Inc.'s acquisition of Sunquest Information Systems, Inc., One Equity Partners' acquisition of M*Modal, and SAIC's acquisition of maxIT Healthcare, LLC.

These three transactions, with an aggregate value of $2.9 billion, represented 26 percent of transaction value in the 1st 3 Quarters of 2012 and 74 percent of Q3 2012 transaction value.

Berkery Noyes: Private Equity Industry - 2012 3rd Qtr Trends Report

Complete report

Q3 2012 KEY HIGHLIGHTS

• The most active acquirer through Q3 2012 was Apax Partners with 10 transactions. Four of these occurred within Q3 2012: Solarsoft Business Systems, RivalEdge, CWIEME Ltd, and ClaimLogic, Inc.
• The largest announced transaction in Q3 2012 and year-to-date was The Carlyle Group's acquisition of Getty Images from Hellman & Friedman LLC for $3.3 billion.

Q3 2012 KEY TRENDS

• Total transaction volume in Q3 2012 decreased by four percent over Q2 2012, from 119 to 114.
• Total transaction value in Q3 2012 increased by 10 percent over Q2 2012, from $11.4 billion to $12.5 billion.

MULTIPLES & VALUE TRENDS

• The median revenue multiple from 2011 through the 1st 3 Quarters of 2012 decreased by 28 percent, from 1.8x to 1.3x.
• The median EBITDA multiple from 2011 through the 1st 3 Quarters of 2012 increased by eight percent, from 8.8x to 9.5x.
• Thoma Bravo, LLC's announced acquisition of Mediware Information System's Inc. represented a 2.4x revenue multiple and 11.4x EBITDA multiple.

TOP TEN DEALS THROUGH Q3 2012

The top ten deals by value have seen five new additions since our half year report: The Carlyle Group's announced acquisition of Getty Images, Hellman & Friedman LLC's announced acquisition of Wood Mackenzie, One Equity Partners' acquisition of M*Modal, Thoma Bravo, LLC's acquisition of Deltek, Inc., and Syniverse Technologies, Inc.'s acquisition of MACH S.à.r.l.

These five transactions, with an aggregate value of $7.1 billion, represented 22 percent of transaction value in the 1st 3 Quarters of 2012 and 57 percent of Q3 2012 transaction value.

Angel investor market in steady recovery, UNH Center for Venture Research finds

The angel investor market in the first two quarters of 2012 showed signs of steady recovery since the correction in the second half of 2008 and the first half of 2009, with total investments at $9.2 billion, an increase of 3.1 percent over the same period in 2011, according to the Center for Venture Research at the University of New Hampshire. A total of 27,280 entrepreneurial ventures received angel funding during the first half of 2012, a 3.7 percent increase from the same period in 2011, and the number of active investors in Q1 and Q2 2012 was 131,145 individuals, a 5 percent increase from Q1 and Q2 2011. The increase in total dollars and the matching increase in total investments resulted in an average deal size of $336,390 in the first half of 2012, comparable to the deal size in the same period in 2011 of $338,400. "These data indicate that angels remain major players in this investment class and at valuations similar to the first and second quarters of 2011. While the market exhibited a stabilization from the first and second quarters of 2011, when compared to the market correction that occurred in 2008, these data indicate that the angel market has demonstrated a steady recovery since 2008," said Jeffrey Sohl, director of the UNH Center for Venture Research at the Whittemore School of Business and Economics. Angels continued their appetite for seed and start-up stage investing, with 40 percent of Q1 and Q2 2012 angel investments in the seed and start-up stage, which is virtually unchanged from the 39 percent in the like period last year. There was, however, a shift to expansion stage financing to 22 percent of investments in Q1 and Q2 2012 from 13 percent in Q1 and Q2 2011, indicating that angels are positioning their investments for exits in the coming year. New, first-sequence investments represent 49 percent of Q1 and Q2 2012 angel activity, unchanged from the same period last year. "Historically angels have been the major source of seed and start-up capital for entrepreneurs and while this stabilization in seed and start-up investing is an encouraging sign it remains below the pre-2008 peak of 55 percent, signifying that there remains a need for seed and start-up capital for both new venture formation and job creation," Sohl said. Healthcare services/medical devices and equipment accounted for the largest share of investments, with 24 percent of total angel investments in Q1 and Q2 2012, followed by software (14 percent), biotech (12 percent), retail (10 percent), IT services (7 percent) and media (6 percent). "After a favored status in the top six sectors for industrial/energy since 2009, which reflected an interest in clean tech investing, interest in this sector waned in the first and second quarters of 2012. Retail and media have solidified their presence in the top six sectors, mainly due to investing in social networking ventures," Sohl said. Angel investments continue to be a significant contributor to job growth, with the creation of 106,400 new jobs in the United States in 2012, or 3.9 jobs per angel investment.

International Venture Capital Deals Activity Declines in Q3

8% drop in the number and 20% decline in the value of VC deals in Q3 2012 in comparison to previous quarter Preqin’s quarterly venture capital deal-flow data shows that 1,226 venture capital financings were announced during Q3 2012, with an aggregate value of $9.3bn – an 8% drop in the number and a 20% decline in the value of deals in comparison to Q2 2012. This dip in activity brings VC deal value back to similar levels of venture capital investments witnessed in Q4 2011 and Q1 2012, while the number of deals taking place remains strong in comparison to recent quarters. Other Key Facts: • 70% of the number and 76% of the global aggregate value of VC deals announced in Q3 2012 occurred in North America, with 860 financings valued at $7.0bn during the quarter, a decrease of 4% in the number and 19% in the value of deals in the region in comparison to the previous quarter. • European deals accounted for 16% of the number and 11% of the global aggregate value of venture deals in Q3 2012, with 191 deals valued at $1.0bn during the quarter, a decline of almost a third in both the number and value of deals in comparison to Q2 2012. • 39 venture deals valued at $370mn were announced in China during Q3 2012, representing 3% of all deals globally. While the number of VC deals in China has increased slightly in comparison to Q2 2012, the value of deals fell 40% from the previous quarter, as investor worries over the Chinese exit market continue to subdue deal activity. • 78 VC deals valued at an aggregate $610mn were announced in India during Q3 2012, a 40% increase in deal value from the previous quarter; this represents the highest levels of VC activity in the country in any quarter from Q1 2010 to Q3 2012. • Israel saw virtually identical numbers of deals compared to the previous quarter, with 19 deals valued at $128mn announced. • Q3 2012 witnessed the continuing prominence of early stage investments in the venture capital sector, with angel/seed stage deals accounting for 22% of investments in Q3, whilst Series A deals represented 16% of deals. Additionally, Series B, C, D and later investments accounted for less than 20% of the number of all deals. • While companies in the internet sector once again received the highest number of VC financings, the aggregate value of these as a proportion of the total for all sectors fell four percentage points from 25% in Q2 2012 to 21% in Q3. • Software deals account for 17% of the value of VC deals in Q3 2012 (up from 11% in Q2 2012), while healthcare deals represent 16% of the number and 22% of the value of VC deals this quarter.

VENTURE M&A AND IPO MARKET CONTINUE TO SLIP

Initial public offerings (IPO) and mergers and acquisitions (M&A) are both down for the third quarter as compared with the same quarter last year. The third quarter ended with 10 IPOs of U.S. venture-backed companies, the fewest since the fourth quarter of 2011. Mergers and acquisitions of venture-backed companies decreased by 46 deals to 99 in the third quarter, a 32% drop from the same period last year and reversing an upward trend seen over the first half of the year, according to Dow Jones VentureSource. Ten U.S. venture-backed companies raised $807 million through IPOs in the third quarter, one fewer than the 11 IPOs that raised $506 million in the same quarter last year. Currently, 36 U.S. venture-backed companies are in IPO registration. Eight of those companies registered in the third quarter. Start-ups based in California dominated exit markets, accounting for nearly half of venture M&As (47) in the third quarter and 60% of IPOs. “Investor caution continues to be evident in the public markets as demonstrated by the lackluster deal count,” said Brendan Hughes, Director of Information Analysis for VentureSource. “Companies that do manage to get out the door are taking longer and raising more money, with a median amount raised of $89.7 million and time to liquidity over 7 years.” Business Support Services Pick Up M&A Slack Business support services was the most active industry for M&As with 23 deals garnering $3.4 billion, an 8% decline in exits but a 56% increase in capital raised as compared to the same period last year. Microsoft Corp.’s acquisition of Yammer Inc. for $1.2 billion was the largest of the quarter and the second largest of the year. The largest IPO of the quarter was Palo Alto Networks Inc., which raised $197 million and listed on the New York Stock Exchange. Groupon Inc.’s acquisition of Savored Inc. increased its tally to eight venture-backed acquisitions for the year, the most by any corporate acquirer. IT M&As Fall, Driven by Software Segment The information technology (IT) industry saw the most dramatic drop in deal activity, as the number of acquisitions fell from 66 in the third quarter of 2011 to 28 in the most recent quarter. The drop was largely driven by the software segment which saw deals fall by exactly half, from 46 to 23. However, the IT industry led the quarter’s IPOs, with four companies going public. “While there have been some high-profile IPO disappointments among consumer-focused companies, enterprise-related offerings found success in recent months,” said Zoran Basich, editor of Dow Jones VentureWire. “Meanwhile, the slip in M&A activity shows that corporate acquirers are still proceeding cautiously amid a slow economic recovery.” During the third quarter, 99 mergers, acquisitions and buyouts raised $13 billion, a decrease of 32% and 12%, respectively, from the same period last year. The median price paid for a company fell to $60 million from $85 million in the third quarter of last year. To reach an M&A or buyout, it took companies a median of $16 million in venture financing, 6% less than in the third quarter of 2011, and a median of 5.3 years, less time than the 5.72 median a year earlier, to exit.