Venture capital investments hit $16.5 billion in quarter despite worrying trends
Companies such as ride-hailing app Uber raised more than $1 billion. Above, the start-up’s office in Hong Kong.
Venture capitalists spread $16.3 billion over more than 1,000 technology, media, healthcare and other companies in the U.S. from July through September, driving a seventh straight huge quarter for start-up investment.
Barring a collapse in investing this fall, 2015 would mark the biggest year nationally and in Southern California for venture capital investment other than 2000 — when the dot-com boom reached a peak, according to the MoneyTree Report released last week by consulting giant PwC, the National Venture Capital Assn. and Thomson Reuters.
But the rosy figures come alongside worrying trends for entrepreneurs and investors. Bets are increasingly concentrating on fewer companies, many of them older. Compared with the last seven quarters, July through September ranked second for amount of cash invested but ranked fifth for number of investments.
Companies such as ride-hailing app Uber and lending service Social Finance each raised more than $1 billion. About three dozen U.S. companies commanded more than $100 million each, with Santa Monica-based retailer Honest Co. among them.
Companies aiming to go public need the cash to sustain rapid growth while waiting out a topsy-turvy stock market.
“No one really knows what the next 12 to 18 months are going to look like, so they now have a couple of years” of funding, said Billy O’Grady, senior vice president at City National Bank.
Investors are paying higher prices sooner in a company’s life than they traditionally have. The median valuation of companies before new investments nearly doubled to more than $68 million over the summer from $36 million in last year’s third quarter, according to Dow Jones VentureSource.
But publicly traded technology companies and Wall Street have shown only tepid interest in swallowing shares this year: 2015 is on track to have the fewest number of initial public offerings, mergers and acquisitions of venture-backed companies in four years, venture data tracking company PitchBook said.
Some venture capitalists are sounding off at the rise of private companies valued at more than $1 billion, a figure that’s become a badge of honor. Higher valuations and delayed sell-offs could result in company founders seeing bigger financial gains when they go public.
But the strategy carries risk because it sets a higher bar for financial performance.
“If the metrics don’t shape up, they have to face the music,” said Kittu Kolluri, general partner at New Enterprise Associates. “I honestly don’t think the market can support this many $1-billion companies. You have over-investment in mediocre companies.”
Experts see other consequences too. The decline in “exits” out of start-up mode, and the rise in so-called megadeals — or financings of more than $100 million — are causing early-stage investment to represent a narrower slice of all fundraisings. The big, late-stage deals reached a new high point at 6% of all deals this summer, according to tracking firm CB Insights.
In a recent report, PitchBook said that a “disproportionate share” of money was going to late-stage companies, a trend that it called “alarming.”
That could signal a peak in the investment cycle, especially if early stage investing is falling off considerably.
By several accounts, the number of companies receiving checks for the first time is falling as wealthy individuals who tend to be the first investors in start-ups exercise more caution.
Still, some start-ups are having little troubling raising cash. First-time entrepreneur David Adams raised a total of more than $12 million in the last year for HomeSuite, a Palo Alto company, to expand to Los Angeles and New York City. The business acts as an online brokerage for renting furnished apartments by the month.
Despite the competition for capital, Adams said his fundraising was easy because no one’s gone after the millions of short-term housing customers he’s serving.
“Financial cycles happen, and they’ve happened forever,” he said. “But when I look at the future, people are going to want more flexibility in housing and they’ll want on-demand solutions. To me, that makes me feel very comfortable.”
Other entrepreneurs who have seized on the upswing in venture capital investment also feel confident.
Culver City-based restaurant chain Tender Greens launched in 2006 with a corporate name TYP Restaurant Group, short for 10-year plan. This summer, the company met its goal of generating a return within 10 years for friends, family and customers who invested early.
An investment from first-time corporate investor Union Square Hospitality Group enabled Tender Greens to buy back shares.
With 2016 as the 10-year anniversary, the company jumped in early to take advantage of the favorable market, co-founder David Dressler said.
“It’s not any secret that there’s been tremendous appetite, particularly in fast-casual restaurants, over the last 12 to 18 months,” he said.
Twitter: @peard33
