Tuesday Jul 29, 2014 by Michael Greeley - General Partner, Foundation Medical Partners
And for that reason I am growing more concerned. The 2Q14 VC investment data just released in the MoneyTree Report prepared by the National Venture Capital Association with an assist from PricewaterhouseCoopers and Thomson Reuters details the $13.0 billion invested in 1,114 companies over the last three months. This is the most dollars invested in a quarter since 1Q01 (and we know how that ended). This is almost 34% more than was invested in 1Q14 and a ridiculous 80% more than 2Q13. As you will see, this quarter was bigger and better than recent prior quarters across almost any dimension.
Year-to-date the VC industry has invested $22.7 billion, more than all of 2009 during the depths of the Great Recession. And while the number of deals this quarter was relatively flat, the amount of dollars invested, amount per round, pre-money valuations – all spiked considerably. Quite clearly VC’s focused on more mature, more established companies, and more often than not in software companies in Silicon Valley. Arguably the data probably include non-traditional VC’s such as hedge funds, private equity firms “going down market” and maybe some offshore investors who were out in force this quarter – and who often show up late in a cycle.
So there a few questions I struggle with as I stared at the data this weekend: are some of these deals “venture deals?” That is, when a company like Uber raises a $1.2 billion round should we include that in the analysis (later I strip it out to normalize for the “Uber effect” and yet many of the conclusions still stand). Second, when so many companies espouse the “lean start-up” mantra, why then are round sizes spiking so dramatically. Lastly, as Christopher Mims of the Wall Street Journal so brilliantly pointed out on July 7, 2014, the data suggest that VC’s have continued to forsake industries which do as he states “basic research and development that transforms lives, in fields such as energy, medicine and food safety.” This last issue is profoundly important and merits much greater scrutiny – at another time perhaps – but the data arguably supports the concern.
And the VC industry has shown that it has at times an “absorption” problem – that is, too much capital too quickly more often than not leads to too many look alike companies all beating each other up over small emerging markets, ensuring only few will be successful.
All of this activity reflects increased liquidity in the system with promising IPO activity (see biotech sector) and strong M&A volumes but also at a time of accelerating recovery in jobs creation and overall compelling real economic growth with benign inflation. Increased manufacturing productivity growth of 3.2% this year (according to ISI Group), when it has consistently been well below 2.0% per annum for the past five years, underscores the benefits of a robust tech economy. But I am reminded that the average bull market runs 57 months with the S&P 500 stock index increasing 165%; this current bull market is now 63 months old and stocks have increased 186% – again, how much better could it get?
So what do we see in the 2Q14 data?
The other important theme that was emerging over the last few years was the rotation away from Seed stage investments to Later stage rounds. And while that trend continued, there are some surprising observations buried in the data.
The other phenomenon, and not necessarily a good one, is the geographic concentration of the VC industry. Not surprisingly Silicon Valley continues to take market share – accelerated by the “Uber effect” – at the clear expense of secondary and tertiary markets.
To the extent innovation represents growth, and VC’s finance that innovation, this concentration risks leaving important geographies behind.