A report issued Friday, finding that venture capitalists poured more money into start-up firms in the second quarter of 2014 than in any three-month period since 2001, put some people in mind of the dot-com bubble of the late 1990s. But the VC community is pushing back against the idea that they are driving valuations up by showering small firms with cash.
According to the MoneyTree report, issued by PricewaterhouseCoopers and the National Venture Capital Association, venture capitalists invested $13.0 billion during the second quarter of 2014, a 34 percent increase in dollar terms over the first quarter. It also represented a 13 percent increase in the number of deals.
The headline deal was a $1.2 billion financing package for ride-sharing service Uber Technologies. Backed by the likes of BlackRock Private Equity Partners, Fidelity Investments and Summit Partners, it was by far the largest deal of the quarter and the biggest deal ever in the two decade history of the MoneyTree report.
Other firms, including Uber competitor LYFT Inc.; Pure Storage, a computer memory firm; and Intarcia Therapeutics, all scored deals worth $200 million or more.
One reason the numbers are so astronomical is that money is being poured into a handful of highly valued pre-IPO firms. These top firms are waiting longer and longer to go public. “There is more concentration in some of these largest companies,” said Jeff Crowe, managing partner at Norwest Venture Partners, a multi-stage venture capital and growth equity investment firm. They get a lot of attention in private investing now, but they would have been public 10 years ago. They are that big already.”
Crowe recognizes that the level of investments and valuations are high. “But you are seeing these big opportunities to transform industries, and those only come along every 10 to 15 years. That’s what people are excited about right now.”
However, according to, Crowe, if you took away the top 10 deals, the second quarter of 2012 would look less like a feeding frenzy aimed at a few big names and more like a normal period in which VCs spread out a lot of smaller investments in promising early-stage firms.
“Yes, the spotlight is on these really big companies that got the large financing. But [entrepreneurs] too can get there,” said John Taylor, head of research for the NVCA. “The venture industry is still very much open for business in terms of taking in new companies into their portfolios.”
Friday’s MoneyTree report bears him out. The second-quarter data shows that seed stage investments increased by 46 percent in dollar terms, with $189 million invested into 55 deals, and early stage investments increased by 17 percent, with $3.8 billion going into 522 deals. In addition, companies receiving VC money for the very first time increased 48 percent to $1.9 billion, making up 14 percent of all dollars in the second quarter.
“[VC]s' attention really is focused on the next generation of companies, bringing them in and bringing them along,” said NVCA's Taylor. “You can start a lot of these companies on a shoestring.”
Especially software firms, apparently. In the second quarter, the software industry led the funding pack by a significant amount, with $6.1 billion invested, a 50 percent rise from the first three months of 2014. The industry also had 454 deals in the most recent quarter, the most of any industry.
“Software is very investible,” Taylor said. “The software industry is capital-efficient and well-regarded by the industry. We will continue to see that strengthened.”
Other sectors that did well include biotech, with $1.8 billion invested in 122 deals, and the Media & Entertainment industry, with $1.0 billion going into 124 deals.
In all, Crowe said, the time is ripe for starting a company. “You can create very powerful products and applications now with under a million dollars,” he said. And the VC community is open for business.
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