Fact or fiction: You’re more likely to see a venture capitalist drowning his sorrows in a bar these days than hopping on an airplane to check out a new deal.
Despite their overwhelming reluctance to travel since Sept. 11, and despite the fact that venture capitalists are indeed spending more time nurturing their existing portfolio companies than ferreting out top-dollar deals these days, the above statement is, in fact, fiction.
Still, there currently seems to be two schools of venture capital. One says that the existing market is good, at least for folks in the private sector, and that there couldn’t be a better time to invest than now, especially with valuations at an all-time low.
The other is comprised of investors who haven’t quite gotten their heads out of the dotcom clouds, and can’t, or won’t, see the silver lining before them.
Either way, it’s time to stop dwelling on how things have gone from boom to bust in the past 18 months or so. In truth, things really aren’t all that bad, and they haven’t been for quite some time.
The year 2000 was an aberration. That shouldn’t come as a shock. But what might surprise some is that, over the last five years, an astronomical $236.29 billion has been poured into privately held companies, according to VentureXpert. That’s more than the $226.84 billion raised by initial public offerings during the same time frame.
The truth is, fallacies abound about the magic of 2000. While the boom market of that year contributed hefty amounts to both the aforementioned figures, it certainly didn’t raise enough to account for all of it.
Start-Ups Aren’t Dead
In the wake of the post dotcom tech wreck, it would seem that start-ups would be at the bottom of VCs’ wish lists for prime investments. Actually, the numbers show the exact opposite is true.
According to VentureXpert, as of September, $609.9 million worth of venture dollars was poured into 97 upstart companies in 2001. Yes, when compared side-by-side with last year, the numbers have dipped. In 2000, 106 start-ups received $890 million.
But consider that in 1999, 90 such companies raised $630.1 million and, in 1998, 76 start-ups received $297.1 million. Going back to 1997, just 55 such companies raised $216 million.
Taking that into account, perhaps the myth of 2000 is perpetuated in part because of the lack of initial public offerings to come through the pipeline this year. The 2001 IPO market has raised just $28 billion to date, its lowest level in five years.
Interestingly, start-ups also were a large part of the market psychology that prompted a record-breaking $58 billion to be raised in the public markets last year, when the “new economy” ideals of revenue multiples and eyeballs were king.
Private Equity Well Still Brimming
Initial public offerings may sound sexier than the arduous private fund-raising process, but does that mean they always lead the capital-raising dance? The raw reality is, over the last five years, both have stepped on each other’s toes.
In 1997, IPOs raised $43.6 billion, and $38.9 billion in 1998, more than the $17 billion and $22.9 billion raised in private equity during both years, respectively. By 1999, the two were nearly neck and neck, with $57.9 billion flooding in from the public markets, and $57.2 billion coming in from private investors.
In 2000 however, private equity dwarfed IPOs. The former pulled in $106.1 billion last year, while the latter garnered just $58.1 billion. And this year private equity dominates again, pulling in $32.8 billion compared to the $28.1 billion for IPOs.
Hence, it seems the private equity well has not run dry after all. After raising an awesome $236.29 billion in just five years, venture capitalists are highly unlikely to decide the market doesn’t work for them anymore. And all other stages of financing – early, expansion and later stages – continue to show activity in the post-dotcom years.
This year, 840 companies received $7.2 billion in early stage financing, a figure that excludes seed and start-up funding. Expansion rounds have raised $16.3 billion for 1,354 companies and 447 companies have received $6.3 billion.
All figures are for the first nine months of this year.