VC Firms Rain Down Cash on Tech Startups, Is Bubble Brewing?
VC Firms Rain Down Cash on Tech Startups, Is Bubble
Brewing?
SAN FRANCISCO — Jan 16, 2015, 6:16 PM ET
By BRANDON BAILEY AP Technology Writer
Cash rained down on startups in 2014, as venture
capitalists poured a whopping $48.3 billion into new U.S. companies — levels
not seen since before the dot-com bubble burst in 2001. Strong technology IPOs
are luring investors chasing the next big return, but with valuations this
high, critics suggest some investors may be setting themselves up for a major
fall.
"It's not that many businesses aren't viable, but
the question is, what are you paying for them?" said Mark Cannice, a
professor of entrepreneurship at the University of San Francisco.
Venture funding surged more than 60 percent in 2014 from
the prior year, most often fueling software and biotechnology companies,
according to a new "MoneyTree Report" issued by
PricewaterhouseCoopers and the National Venture Capital Association, based on
data from Thomson Reuters. But the money wasn't spread around to buoy many more
companies. A few just got huge piles of cash.
Last year saw a record 47 "mega-deals," defined
as investments of more than $100 million. That's nearly twice as many as
reported in 2013, said Mark McCaffrey of PricewaterhouseCoopers, who leads the
accounting and consulting firm's global software practice.
Uber Technologies, the ride-hailing service disrupting
the transportation industry and generating plenty of press, received the top
two biggest rounds of investment last year. Each raised $1.2 billion for Uber,
and the company's value is now pegged at $41 billion. Other major deals
included $542 million (mostly from Google Inc.) invested in Magic Leap Inc., a
secretive startup working on virtual reality technology; $500 million in Vice
Media, which operates online news and video channels; and $485 million in
SnapChat, the popular messaging service.
What's driving those deals?
U.S. tech startups are proving they can reach vast global
markets and reap sizable revenue, said McCaffrey. And there are more investors
eager to get a piece of that return — private equity and hedge funds and
corporate investment divisions are vying with traditional venture capitalists
to back promising startups. But critics say some companies may never make
enough money to justify the sky-high valuations.
The worries harken back to the go-go year of 2000, when
the dot-com boom drove venture funding to a peak of $105 billion. But then a
wave of new Internet companies crested and collapsed, many of them failing to
ever make money. Venture funding bottomed at $19.7 billion by 2003 and spent
the last decade bobbing in a $20 billion to $30 billion range before making the
big leap last year.
Several experts expect funding this year to continue at a
similar rate. Commercial software companies, especially those that offer
cybersecurity services and tools for analyzing large amounts of data, are
expected to be big draws in 2015, along with biotech and health technology.
So are we approaching another bubble?
Most experts won't go that far, but are raising concerns
about so-called "froth" in the market. Robert Ackerman, managing
director and founder of Silicon Valley venture firm Allegis Capital, is
convinced new software and communications startups are revolutionizing the
world's economy. However, beyond the risk of investors losing money, Ackerman
said some companies may see these cash windfalls as permission to burn through
money at an excessive rate, rather than spending at a level justified by their
own realistic earnings potential.
"There really is an unprecedented level of
innovation that is taking place," he said. "What I worry about is how
the excess of capital is affecting valuations and expectations."
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