Venture Capital Investment Climbs to Dotcom-Era Levels

Venture Capital Investment Climbs to Dotcom-Era Levels

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For venture capital, it’s back to the glory days of the dotcom era — or almost. Venture capital partnerships invested $9.5 billion in 951 deals during the first three months of 2014, more than in any quarter since April through June of 2001, when dotcoms were turning into “dot bombs” at a record clip. That’s according to the regular MoneyTree Report produced by PricewaterhouseCoopers and the National Venture Capital Association, and using data from Thomson Reuters, and released early Friday. 

Venture investors’ inclination to keep writing checks at such a rapid clip has been helped by their ability to collect some hefty profits on earlier investments. That’s because the IPO market really sizzled at the beginning of 2014 – and venture-backed IPOs have gotten a particularly warm welcome. In the first quarter of 2014, 36 venture-backed companies made their public market debut (more than in any other quarter in the last five years) raising $3.27 billion. That’s more than four times the amount raised in the first three months of 2013. 

Related: IPO Buyers Beware — Sizzling Market for Offerings Is Cooling 

Over the last 12 months or so, underwriting pitches for startup companies with limited operating histories but unlimited growth potential (if you listen to the bankers’ spiel) have fallen on welcoming ears. Interest rates remain low. The economy is more stable. Investors have been more willing to take on risk — as long as they can see that they’ll also be paying for plenty of growth potential. 

Twitter may (NYSE:TWTR) have grabbed the headlines with its blockbuster IPO, which gave the company a $25 billion valuation despite the fact that it had yet to generate a penny in profits. But its debut was just the tip of the iceberg, as scores of smaller companies rushed to go public. 

That was fabulous news for venture investors, for whom IPOs are the holy grail of exit strategies. That’s where a VC dreaming of backing the next eBay, Amazon, or Facebook makes the 10-fold, 50-fold or 100-fold returns that transform his or her business and reputation. The alternative — selling the startup company via an M&A transaction — is decidedly second best. 

The problem for venture investors is that for most of the last dozen years it has also been virtually the only option for all but a handful of the companies. And without the big, lucrative exits, VCs have struggled to post big returns. Unable to post attractive returns, it became tougher for them to raise new funds and many saw the balance of power tilt decisively in favor of their investors, or limited partners. 

The dramatic turnaround in the IPO market has changed all that. So there’s a lot riding now on whether the recent market selloffs — much of the selling pressure concentrated in traditional VC domains like technology and biotech, and involving VC-backed companies like Zynga, Facebook, and Twitter — will put a dent in the IPO frenzy. If it does, it could bring to an abrupt and early end the giddy and ebullient mood in Silicon Valley and other venture capital hubs. 

Related: A Wall Street Superstar Is Ready for His IPO Close-up 

Some of the biggest VC deals of the first quarter, as logged by the MoneyTree survey, were pre-IPO cash infusions in companies that Wall Street expects to announce IPO plans any day now. Cloud storage service Dropbox is within months of filing its S-1 documentation with the SEC, rumor has it; it picked up $325 million in expansion funding during the first quarter from a group of investors led by Sequoia Capital as well as a $500 million credit facility from JPMorgan Chase. (It also has added former U.S. Secretary of State Condoleezza Rice to its board.) 

Then there is Airbnb, the online room-rental platform, which captured $200 million from a group led by Andreessen Horowitz LLC and that also included Sequoia Capital LLC. It’s another rumored IPO candidate. 

The big question now is whether the IPO window will remain open long enough for companies like these to make it through, or whether they will have to ensure that cash lasts for a very, very long time. 

In spite of all the prophets of doom ready to interpret the recent selloff as marking a decisive turning point in the cycle, I’m not so sure. When we’re in the midst of all the noise and hubbub of a correction, it’s easy to be downbeat, especially when at least half of the market’s pundits and analysts have been fretting anxiously about valuations for six months or more. The fact that scores of analysts argued that Twitter was overvalued didn’t prevent its stock from soaring in the wake of the IPO. And it’s still trading at $45, well north of its $26 IPO price. 

Companies like Dropbox and Airbnb were already positioned to become “megadeals” long before the IPO boom got underway on Wall Street. The odds are that companies like this and the IPO market itself will prove to have long coattails — that even if the IPO window slams shut for three, six or nine months, VC investors will remain optimistic. 

That’s what we saw back in the wake of the dotcom collapse, when it took months for a far more brutal selloff to begin showing up in a rationing of venture capital dollars. And let’s face it, we’re weeks into a moderate correction, not a meltdown. Fretting for a rapid end to this rebound in VC investing strikes me as premature.

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