Venture capital investments in young companies hit $17.5 billion in the second quarter of this year, PricewaterhouseCoopers and the National Venture Capital Association (NVCA) reported recently. Observers are starting to compare the current market with the bubble market of 2000, but I don’t think the comparison is apt. The amount of money involved remains far below 2000 levels, and the funding scene is very different to what it was 15 years ago.
Let’s start with the statistics. While the amount venture capitalists will put into young companies this year is on track to exceed the $49 billion that the industry invested in startups in 2014, the amount will fall far short of the $144 billion (in 2015 dollars) that the NVCA reports venture capitalists put into companies in 2000. Even the second quarter’s $17.5 billion of investment in young companies isn’t that high by comparison. In inflation-adjusted terms, second quarter of 2000 investment totaled $38 billion.
Venture capitalists are doing far fewer deals than they did 15 years ago. In 2000, venture capitalists made 8,042 investments. Last year, they completed only 4,361, the NVCA data show. The most recent figures – those for second quarter of this year – show that number of investments made was only 56 percent of the level in the same quarter in 2000, PricewaterhouseCoopers Moneytree finds.
Fewer venture capitalists manage less money now than back in 2000, NVCA data show. Fifteen years ago, the industry had $331.5 billion (in 2015 dollars) under management. In 2014, it managed less than half that amount – $158 billion (in 2015 dollars). The number of investors is likewise down significantly. In 2000, there were 1,704 venture capital funds; in 2014, there were only 1,206.
Today, venture capital money is flowing into much later deals than it did in 2000. At the turn of the millennium, 17 percent of the investment dollars went into later-stage deals, versus 25 percent in 2014, NVCA statistics show. In 2000, 73 percent of venture funding went into follow-on deals rather than first-time funding. Last year, the follow-on funding fraction was 85 percent.
The jump is even more extreme on the deal side. In 2000, only 10 percent of venture capital deals were later stage, as compared with 19 percent in 2014. In 2000, 58 percent of companies receiving a venture capital investment got follow-on funding, versus 66 percent in 2014, NVCA figures reveal.
Venture capitalists have largely left the seed stage. According to PricewaterhouseCoopers, the number of seed-stage venture capital deals in the second quarter of 2015 was only 25 percent of its level in the second quarter of 2000.
Changes in the initial public offering market are driving these differences. Regulations put in place since 2000 have made going public much less appealing than it used to be. As a result, fewer companies are going public today, and they are taking much longer to IPO than they did 15 years ago, NVCA figures show. Only 115 venture-backed companies went public in 2014, as compared with 238 in 2000. In 2000, 39 percent of successful venture capital exits occurred through IPOs. In 2014, only 20 percent did. The median time to exit through an IPO was 3.1 years in 2000, and now it is 6.9 years.
With fewer companies going public and stock market valuations hitting historically high levels, mutual funds and hedge funds are moving into investments traditionally made by venture capitalists. As new investors refill the punch bowl, the party might continue. But that party is different from the one investors attended in 2000.