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Economic Forecasts

More Money Available for Startups

After two years of sitting on the sidelines, private investors are moving to help promising companies get on their feet.

Venture capitalists are back in the game. While many big companies sit on huge cash reserves, individual investors, hedge funds and others are looking for promising start-ups and finding plenty.

Venture capital (VC) investment will rise nearly 50% this year to $26 billion and likely reach $29 billion next year. Of course, that follows a depressed couple of years, after VC investment peaked at $100 billion in 2000.

One driver: New life in the stock market. VC investors get a return on their money when start-ups go public, and initial public offerings (IPOs) are in vogue again. So far this year, 88 companies have raised more than $13 billion with IPOs, with lots more to come when firms feel the stock market is steadier.

“It’s been a tough venture capital market because there hasn’t been an exit market,” says Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers. An increase in IPOs lets investors cash in their investments and reinvest in other companies, he says.

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We see 125 IPOs raising $22 billion in 2011, assuming, as we do, no double-dip recession is ahead.

The boost in VC and IPOs means more jobs.

Young firms account for 11% of private employment, or about 12 million jobs. Even in the slow years of 2006-2008, when the private sector grew just 0.2%, VC-backed companies managed a 1.6% growth rate, according to data from IHS Global Insight and the National Venture Capital Association.

Which sectors will see the most VC, IPO and job growth in the next year?

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• Retail, for one. Many firms will add stores and hire workers right away. They’ll take heart from some successful IPOs this year: Gordmans of Omaha, Neb., for example, raised $32.9 million to pay off debts and open stores in new markets.
• Life sciences. Biotech and medical device firms get the most in VC, a 43% jump in second quarter 2010 over 2009. In one of the larger deals this year, Tesaro of Boston landed $60 million from New Enterprise Associates to acquire, develop and market cancer therapies and cancer care products.
• Green tech. Investments in pollution reduction and alternative energy doubled last quarter as companies took advantage of government incentives. Boston-based 24M Technologies raised $10 million from the private sector and tripled its workforce to 30. And an IPO raised enough for Tesla Motors, a Silicon Valley maker of electric cars, to plan 50 new retail outlets.
• Internet firms. They’re attracting heaps of more capital, especially companies specializing in online security. Retail Internet companies won’t be as popular as those geared toward business users. One example: Kareo, a California-based creator of Web-billing software for doctors, will double its staff to 40 with new VC funds.

More deals in these and other sectors are in the pipeline. And that spells good news for the economy as a whole.