Venture capital investing stays hot By Heather Somerville – San Jose Mercury News

Venture capital investing stays hot

It’s a fine time to be a tech entrepreneure

Investors are funding companies at record pace, writing checks — big, big checks — to startups large and small that are creating everything from business software to cures for crippling diseases. A new report out this week shows that last quarter was the largest for venture capital investments in Silicon Valley since 2000 — an astonishing $9.1 billion — refuting, for the time being, any murmurs of a slowdown or inevitable market correction.

This market is hot, and appears to be staying hot.

“People are getting funded all the way up the food chain,” said Tom Ciccolella, U.S. venture capital leader for PricewaterhouseCoopers. “Any aspiring entrepreneurs looking for money, they seem to be getting funding.”

The Airbnb website is displayed on a laptop on April 21, 2014 in San Anselmo, California. San Francisco-based Airbnb raised $1.5 billion in the past

The Airbnb website is displayed on a laptop on April 21, 2014 in San Anselmo, California. San Francisco-based Airbnb raised $1.5 billion in the past quarter at a $25.5 billion valuation, making it the third-most-valued venture-backed company in the world, according to data from Dow Jones. (Justin Sullivan/Getty Images)

The only time investors doled out more cash was the second quarter of 2000, when companies raised $9.3 billion, according to The MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters. Adjusted for inflation — which the report does not do — that’s about $13 billion.

The $9.1 billion raised represents a 50 percent increase over the first quarter this year and a 16 percent increase over the same three-month period a year ago.

 The eyebrow-raising amounts will likely amplify chatter about another tech bubble, but VCs show no sign of slowing their investment pace, always in search of the next Facebook and Uber. U.S. venture capital firms raised $10.3 billion during the second quarter this year to fund the next-generation of startups, the largest amount since 2007, according to a report out earlier this month by the National Venture Capital Association. And as long as there is money for the taking, entrepreneurs are quick to stick out their hand.

“The opportunities to disrupt and innovate only happen every so often, so you need to be there in force,” said Jeffrey Grabow, U.S. venture capital expert at consulting firm EY. “You can’t just wade in.”But, he added: “We’re definitely in an up cycle, and it could last for several quarters, but at some point it has to end. And that doesn’t necessarily have to be the end of the world.”

Much of the venture funding in the second quarter went to the usual suspects — hot companies with rapid growth and already-big valuations that have investors salivating, such as Lyft and Pinterest — but data show VCs are also writing checks in the mid-nine figures to newer and lesser-known Silicon Valley firms. Denali Therapeutics, a South San Francisco company researching treatments for neurodegenerative diseases, raised $217 million in May in its first funding round, according to MoneyTree. And Zenefits, a 2-year-old HR software provider based in San Francisco and widely considered the fastest-growing company of its kind, raised $500 million that same month.

“I think of this like a car — if you want to go really far, really fast, you’re going to burn a lot of gasoline,” said Parker Conrad, Zenefits CEO and co-founder.”So we made the mother of all pit stops to fill up on gasoline and beef jerky for the trip ahead.”

But even in a time of plenty, there are the occasional busts. On Friday, San Francisco-based Homejoy, a website to find professional cleaners, announced it would shut down at the end of the month. The startup had raised about $40 million from investors but had struggled to raise any new funding since 2013.

The involvement of hedge funds, private equity groups and sovereign wealth funds in what have traditionally been pure venture deals continues to drive up the price tag on funding rounds. And despite the dollar amount of funding going up, the number of deals has remained fairly steady — hovering between 300 and 400 each quarter in Silicon Valley for the past few years and averaging 1,093 a quarter nationally, according to MoneyTree. The result is that a handful of companies, most of which are approaching an initial-public offering, are receiving a disproportionate chunk of the money.

Nationally, the top eight deals received over one-third of the total investments for the quarter — $17.5 billion. Topping the list was San Francisco-based Airbnb, which raised $1.5 billion at a $25.5 billion valuation, making it the third-most-valued venture-backed company in the world, according to data from Dow Jones. And Jawbone, the wearables fitness tracking device company in San Francisco, raised $300 million at a $3.3 billion valuation.

“They are raising money because they can, and they have great growth plans,” Ciccolella said of the billion-dollar companies, also known as “unicorns.”

Many of these so-called unicorns are expected to soon become public companies. If they go public at a valuation lower than the valuation they received in the private market — which many think is inevitable, because the public markets won’t stomach, say, a $50 billion valuation for Uber — it’s possible these big funds will rethink their investing strategy and take their money elsewhere.

“There will be a time when not as much capital is available with as much apparent ease, and companies will have to deal with that,” Grabow said.

For some VC firms, the bigger rounds mean fewer investments — and bigger risks. When investing partner Tomasz Tunguz joined Redpoint Ventures in 2008, the average investment for the firm was about $3 million to $5 million, he said. Now, it’s $10 million.

“You’ve got half as many shots on goal,” he said. “You’ve got to be doubly sure.”

Contact Heather Somerville at 510-208-6413. Follow her at Twitter.com/heathersomervil.

Top Silicon Valley VC deals for Q2

Airbnb, $1.5 billion (San Francisco)Zenefits, $500 million (San Francisco)
DocuSign, $278 million (San Francisco)
Denali Therapeutics, $217 million (South San Francisco)
Aduro Biotech, $200 million (Berkeley)


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