Venture capitalists poured a whopping US$48.3 billion into US startup companies last year, investing at levels that have not been seen since the heady days before the dot-com bubble burst in 2001.
Software and biotechnology companies were the leading recipients of venture funding last year, which rose more than 60 percent from the previous year, according to a new report issued yesterday.
“There really is an unprecedented level of innovation that is taking place,” said Robert Ackerman, managing director and founder of Allegis Capital, a Silicon Valley venture firm. “What I worry about is how the excess of capital is affecting valuations and expectations.”
The new figures come from the quarterly MoneyTree Report issued by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters. The report counted 4,356 venture deals last year, only 4 percent more than the 4,193 deals reported in 2013. However, the value of those deals has surged.
Last year saw a record 47 “mega-deals,” defined as investments of more than US$100 million, nearly twice as many as reported in 2013, Mark McCaffrey of PricewaterhouseCoopers said.
“We’ve never talked about this level of fundraising before,” said McCaffrey, who leads the accounting and consulting firm’s global software practice. “This points to a dynamic change in the market.”
The two biggest deals last year were separate rounds of investment in Uber Technologies Inc, now valued at US$41 billion.
Other major deals included US$542 million invested in Magic Leap Inc, a secretive startup working on virtual reality technology; US$500 million in Vice Media, which operates online news and video channels; and US$485 million in SnapChat, the popular messaging service.
Software companies got the biggest chunk of funding, as they have for the last five years. Venture investors put US$19.8 billion into software deals last year, or 77 percent more than in 2013. The second leading sector, biotech startups, raised US$6 billion or 29 percent more than a year earlier.
McCaffrey said last year’s surge shows investors increasingly believe US tech companies are capable of succeeding quickly on a global scale, which means they are poised to reach vast markets and reap sizable revenue.
He also said that new kinds of investors, including private equity or hedge funds, and the corporate investment arms of major companies, are now vying with traditional venture capital firms to back promising startups.
“What we’re seeing is healthy competition for these deals, which can drive them up to be frothy,” McCaffrey said.
However, some prominent figures in Silicon Valley have voiced alarm at the valuations of some companies, suggesting that investors are taking on excessive risk.
“There has been increasing concern about valuations,” said Mark Cannice, professor of entrepreneurship at the University of San Francisco. “It’s not that many businesses aren’t viable, but the question is what are you paying for them.”
Still, many venture investors shy away from characterizing the current trend as a “bubble.”
Ackerman, whose firm focuses on commercial software and networking technology, said he is convinced that new software and communications advances are revolutionizing vast sectors of the world’s economy.
He said hedge funds and other new investors are investing at higher levels because they expect significant returns after seeing a series of successful initial public stock offerings over the last year.
“They are basically chasing returns,” he said.
That has led to “excess capital and excess valuations,” Ackerman said. “Are there companies out there that are overvalued today by traditional metrics? Yes.”
The market will eventually recalibrate, he said, and when it does, some investors may lose money.
Meanwhile, some firms that are receiving massive infusions of cash are not spending it wisely, which can lead to unsustainable operations, he said.
However, McCaffrey and other experts said they expect venture funding will continue without any sharp drop this year.
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