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 an absolute 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 Friday by consulting giant PwC, the National Venture Capital Assn. and Thomson Reuters.
But the rosy figures come alongside trends worrisome to entrepreneurs and investors.
Bets are increasingly concentrating on fewer companies, many of them older. Despite being the second-largest quarter for amount of cash invested since the start of last year, July through September was the third-smallest quarter for number of investments.
That’s because companies such as ride-hailing app Uber and lending service Social Finance raised more than $1 billion each. About three dozen U.S. companies commanded more than $100 million each, with Santa Monica-based retailer Honest Co. among them.
For many companies aiming to go public, the capital is needed to sustain rapid growth and outlast a topsy-turvy stock market. Investors have obliged, even paying higher prices to buy shares. The median valuations of companies prior to 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 of highly valued start-ups this year: 2015 is on track to see the fewest number of initial public offerings, mergers and acquisitions of venture-backed companies in four years, the venture data tracking company PitchBook said.
Experts say the decline in “exits” out of start-up mode and the rise in so-called megadeals are causing early-stage investment to represent a narrower slice of all fundraisings for five straight quarters, dropping to 23% over the summer, according to tracking firm CB Insights. The big, late-stage deals reached a new high point, 6% of all deals.
In a recent report, PitchBook said “late-stage companies attracting a disproportionate share” of capital was “alarming.” It called the trend “a rich-get-richer effect, in some cases, which could signal the approach of a peak in the [investment] cycle, especially as early stage numbers are sliding considerably.”
Indeed, 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 are exercising more caution.
They’re taking stock that a sustained market decline “will mainly hurt the high-flying, least-prepared companies and their investors and employees,” PitchBook said. “Accordingly, they are beginning to pull back in the number of financings, if not just yet closing off the spigot of late-stage capital, although it’s hard to see that continuing to flow so heavily for much longer.”
Globally, the flow is robust too. About $98 billion was invested in the first three quarters of 2015 worldwide, 11% more than the nearly $89 million that poured in during all of last year, CB Insights said. But there too, 60 megadeals of more than $100 million at incredibly high valuations in the third quarter meant the median financing was for $35 million -- or about 75% larger than last summer.
“The rise in valuations across all stages, declining deal counts and the elevation in capital invested all signal that early-stage venture capital is moving into even riskier territory than normal,” PitchBook said.
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