Mega Deals (Like Uber) Boost Venture Funding to $13B in Second Quarter

7/17/14Follow @bvbigelow

Venture capital investors pumped almost $13 billion into 1,114 U.S. startups in the second quarter—marking the highest level of VC funding in 13 years, according to the MoneyTree Report being released today.

While the number of deals is comparable with recent quarters, the $12.97 billion VCs deployed this spring was a third more than the $9.7 billion VCs invested during the first quarter, and 81 percent higher than the $7.2 billion invested during the same quarter of last year, according to MoneyTree data. PricewaterhouseCoopers and the National Venture Capital Association (NVCA) prepare the MoneyTree Report, based on data from Thomson Reuters.

(Our list of MoneyTree’s Top 10 Deals is below.)

The latest findings confirm a quick snapshot on VC activity that came out last week from CB Insights, showing that second-quarter venture funding totaled almost $13.9 billion. Another source of data on VC activity, Dow Jones VentureSource, reported yesterday that over $13.8 billion was invested nationwide over the three months that ended June 30.

The absolute numbers vary because each survey uses different sources and ways of measuring venture dollars and deals. For example, the MoneyTree Report did not include a $450 million round in San Francisco-based Airbnb, which was widely reported in April and was included by CB Insights and Dow Jones VentureSource. (A MoneyTree spokeswoman said the Airbnb would likely be included in third-quarter data because the deal won’t actually be funded until July.)

Nevertheless, all three VC surveys agree that venture investments levels this spring were the highest since the dot-com era, and 2014 is already shaping up to be a spectacular year for the VC industry.

Comparisons to the dot-com bubble might seem inevitable, but a couple of factors are distorting the picture, according to John Taylor, director of research for the NVCA.

Taylor noted that the top 10 deals in the MoneyTree Report together accounted for $2.6 billion in deployed capital—or roughly 20 percent of the $13 billion invested during the quarter. The single biggest deal on the list was the $1.2 billion financing for San Francisco-based Uber, which also ranked as the single largest quarterly investment since the MoneyTree Report began reporting on venture capital investing in 1995.

Take away the top 10 mega deals, Taylor said, “and it looks pretty much like business as usual.”

A related factor, Taylor said, is a surge in investments by hedge funds, private equity firms, mutual funds, and other non-traditional venture investors. For example, the private equity firm TPG led the $450 million investment round in Airbnb.

In past years, the MoneyTree Report only counted investments made by traditional venture investors, Taylor said. But investments by international hedge funds in Facebook’s venture rounds challenged MoneyTree researchers to change their thinking, Taylor said.  MoneyTree now includes non-traditional investments in venture rounds, as long as the deals were led by traditional venture firms.

Late-stage rounds for companies like Uber, Lyft, and Pinterest have been attracting non-traditional investors because of their substantial upside potential, according to Jeff Crowe, a managing partner in the Palo Alto, CA, office of Norwest Venture Partners. “Any time interest rates stay at 1 or 2 percent for a long time, investors in all asset classes start looking for higher rates of return,” Crowe said.

“You’re seeing even public investors saying that these companies are transformational,” Crowe explained. They are disrupting existing industries, such as the taxi and hotel industry, by introducing new technologies and ways of doing things, and they are becoming leaders in ways that won’t be seen again for another 10 or 15 years.

Valuations might seem high, but Crowe said companies like Uber represent long-term transformations in the U.S. economy that will take decades to play out. “These technology trends are only accelerating,” he said. “They are not reversing. They are not going away.”

Other highlights noted in The MoneyTree Report:

—Software got more funding than any other sector during the quarter, rising 50 percent from the prior quarter to $6.1 billion. Software also accounted for the most deals, 454.

—Biotechnology ranked as second largest sector for dollars invested, with $1.8 billion going into 122 deals.

—Nine of 17 industry categories in the MoneyTree Report showed decreases in dollars invested in the second quarter. Funding for Business Products and Services declined 69 percent, Telecommunications decreased by 43 percent, and Semiconductors fell by 29 percent.

—Venture investors sank $189 million into 55 seed-stage deals in the second quarter, and $3.8 billion into 522 early stage investments. Combined seed and early stage deals accounted for 52 percent of the total deal volume, compared to 53 percent in the prior quarter.

—VCs invested $5.7 billion in 308 expansion-stage deals, which accounted for 28 percent of all second-quarter deals. That was up slightly from 27 percent in the first quarter.

—Venture firms invested $3.2 billion in 229 late-stage rounds, which accounted for 21 percent of total deal volume in the second quarter. It was 20 percent in the prior quarter.

According to the MoneyTree Report, the Top 10 Deals are:

Uber Technologies; San Francisco; Software; $1.2 billion

Lyft; San Francisco, Software; $250 million

Pure Storage; Mountain View, CA; Computers; $225 million

Intarcia Therapeutics; Boston, Biotech; $200 million

Pinterest; San Francisco; Media and Entertainment; $160 million

SunRun; San Francisco; Industrial Energy; $150 million

Nanthealth; Culver City; Software; $135 million

Proteus Digital Health; Redwood City, Biotech (Digital Health); $119.5 million

Anaplan; San Francisco; Software; $100 million

New Relic; San Francisco, Analytic Software; $100 million

 

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow