Power is consolidating in the venture capital industry as investors bet on fewer firms to deliver larger, quicker returns from technology start-ups, while reducing financing options for entrepreneurs.
US venture capital firms raised $5.9bn in the second quarter of the year, with just five funds accounting for 80 per cent of total dollars, according to the National Venture Capital Association.
"For entrepreneurs, in the short run, this means there are fewer deals getting done," said Mark Heesen, president of the association.
"That is not necessarily a bad thing though," he said, as venture firms are now more likely to invest strategically in fewer competing companies, rather than throwing money at similar "me-too" companies that have a lower likelihood of success. This will turn the landscape for start-up financing into a more "Darwinian environment," Mr Heesen said, with only the best of the best winning backing.
The fallout will be felt in the clean technology and biotechnology start-ups, which tend to find money at smaller, regional companies "the ones that are having more trouble attracting new money as investors gravitate to Silicon Valley.
These firms invest in a broader range of information technology companies, which tend to generate returns on a much shorter timeline than clean tech or biotech.
Second quarter investment of $5.9bn for 2012 more than doubled over the same period last year, when the industry raised $2.6bn, while the number of funds receiving money dropped 18 per cent, from 45 last year to 38 this year. This is the lowest number of funds raising capital since the third quarter of 2009, when the US recession caused firms to scale back on new investments.
The quarter was led by New Enterprise Associates in Menlo Park, California, which raised almost $2.1bn, and Institutional Venture Partners, also in Menlo Park, which raised $1bn. The latter firm specialises in later-stage companies on track for initial public offerings .
Lightspeed Venture Partners raised $675m and Kleiner Perkins Caufield & Byers raised $525m. The fifth fund, Mithril Capital Management, launched in the second quarter with $402m, backed by Peter Thiel.
At the same time that early stage investments in start-ups are consolidating among venture capital firms, more angel investors are stepping in to pick up some of the slack, Mr Heesen said. In the first quarter of 2012, the average angel investment was $700,000 per deal, steady with 2011 levels, according to a new nationwide survey by the Angel Resource Institute and Silicon Valley Bank.