Thursday, November 21

Decoding: Venture Capital Investments Globally

Venture capital investments in startups rebounded in the second quarter, as a general stock market recovery helped restore confidence, according to a new report published on Friday.

Investors plowed $15.3 billion into venture-backed startups in the second quarter of this year, a 20.5 percent increase over the $12.7 billion invested in the first quarter, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association. The report’s conclusions are based on data from Thomson Reuters.

“There was a bit of a pause in the first quarter when the public markets took a beating,” said Sean Cunningham, managing director of Trident Capital Cybersecurity. “The public markets are back. Everyone is bullish.”

Ride-hailing company Uber Technologies Inc and messaging app Snapchat boosted the quarter, raising a combined total of $4.8 billion, or nearly a third of total investments.

In terms of total dollars, second-quarter investments outpaced all but three quarters since 2000, the height of the dot-com boom, suggesting that despite widespread concerns over valuations and a dormant market for tech initial public offerings, venture capitalists and institutional investors are not shying away from writing big checks.

“It’s not heading straight to the moon and it’s not going off a cliff,” said Tom Ciccolella, who leads the venture capital practice for PwC, a consulting firm.

Even as total funding was up sharply, the number of deals was down by about 5 percent, falling to 961 from 1,011 during the first quarter.

“We are being more selective,” said Erik Gordon, professor at the University of Michigan Ross School of Business and faculty adviser to the university’s venture capital fund.

“We’re not going to invest in everything that says ‘We are the Uber of X’ or ‘the Facebook of Y.”

Indeed, the bar for companies seeking venture capital funding is higher than it was a year ago. After a rash of startups that had received huge funding rounds over the last year failed to reach growth targets or proved to be unsustainable businesses, investors pulled back. The global stock selloff last summer and hammering of tech stocks early this year increased anxiety.

Valuations are generally lower this year, with venture capitalists reporting valuations dropping by 30 percent to 50 percent, and the lower prices are helping to get deals done.

The involvement of mutual funds and sovereign wealth funds continues to drive huge deals. The biggest deal of the quarter was Uber’s $3.5 billion round from Saudi Arabia’s Public Investment Fund, followed by Snapchat’s $1.3 billion round from Fidelity Investments and T. Rowe Price, among others.

It was the first time that two venture-backed startups in the same quarter raised billion-dollar-plus investments, according to PwC. Uber’s $1.2 billion financing in the second quarter of 2014 was the first round of that size on record.

Venture capitalists continue to favor software startups, which took in $8.7 billion in funding, a 70 percent increase from the previous quarter.

Other industries saw a pullback. Investments in financial services fell 25 percent to $601 million, likely a response to recent struggles at lending platforms Prosper Marketplace and Lending Club.

“We’ve gone pretty cold on these lending platforms,” Gordon said.