A New Venture Capital ?
Reprinted with the permission of Udayan Gupta and Tom Darling These are heady times for the venture capital industry. Record exits, record investments and record fundraising. More important, investors – many skeptical of venture capital as a legitimate asset class – are coming back to the industry. Not the largest ones such as Calpers but many smaller ones – small college endowments, smaller pension funds and, most significant, wealthy individuals and family offices from within the US and abroad. “It’s a more rational market,” says Andrea Auerbach, managing director and global head of private investment research at Cambridge Associates. “Lessons have been learned. The Internet boom of the 2000s caused a surge of capital that inflated valuations and subsequently lowered returns. And while the present boom creates the temptation to flood the market with new capital – a reprise of the early 2000s — it hasn’t happened,” she explains. This is not a venture capital renaissance by any means. But the numbers suggest that the industry is not just all about a few titans that pump up the volume but about a diverse community of venture capitalists that is beginning to find its own niches and strategies and marketing to the appropriate investors. Still, the numbers are at the heart of the re-emergence. Venture capital funds are making money. Venture capital firms realized $105 billion worth of investments in portfolio companies during the first three quarters of 2014, higher than in any other entire year in the period since 2007, according to Preqin, a UK based provider of alternative assets data. And they’re investing money too, adds Preqin. More capital was invested in companies by venture capital firms in the second quarter than in any other quarter, with $23 billion of funding across the quarter. Alongside, corporate venture funds are investing in record amounts. Corporate venture funds invested $993.6 million in 176 deals to U.S.-based companies during the third quarter of 2014, according to the MoneyTree Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA). Indeed, corporate venture accounted for 10.0% of all venture dollars invested and 17.2% of all venture deals in the third quarter, marking the strongest quarter of 2014 as a percentage of total venture investing. One hundred and sixty corporate venture groups invested almost $3.3 billion in 562 deals through the third quarter of 2014, representing 9.3% of total venture dollars invested and 17.7% of all venture deals. The venture economy also benefited from the overall surge in M&As. 127 U.S. based venture-backed companies were acquired for $20 billion, the highest quarterly amount since 2000. Facebook, Cisco and Google were among the most prolific buyers and continue to be among the most likely suitors for every major deal. Perhaps most important, investors are returning to the venture capital industry. To date, venture capital funds have raised $38 billion surpassing the $31billion raised by 274 funds that closed in 2013. And more than half (56%) of venture capital investors surveyed in October 2014 said they would make their next commitment to a venture capital fund by the end of 2015.