Venture Capitalists Are Raising Less Cash for Tech's Next Big Thing
The venture capitalists who fuel Silicon Valley's tech ecosystem raised less cash last quarter, slowing the frenzied flow of dollars gushing into the industry.
Nationwide, VCs raised $5.3 billion in the third quarter of this year, a sharp drop from the $10.9 billion they raised the quarter before, according to the Venture Monitor report released Monday evening by PitchBook Data and the National Venture Capital Association. That means there's less capital available to fund the Bay Area's next Facebook or Uber. But experts say that's not necessarily bad, because it assuages fears of "bubbles" and inflation.
"I think it's great," said Nizar Tarhuni, a senior analyst at PitchBook. "I think it's healthy."
Despite months of talk of belt-tightening and cost-cutting at Bay Area startups, some analysts had speculated venture capitalists would set yet another fundraising record in 2017. But Tuesday's numbers tempered those expectations.
VCs raked in more than $40 billion last year from the pension funds, foundations, endowments and other limited partners that fund their investments -- a 10-year high for the cash-flush industry. But so far this year, VCs have raised a comparatively paltry $24.4 billion, and the number of VC firms closing a round of funding dropped to the lowest level in five years.
That's good news, Tarhuni said, because last year's break-neck fundraising pace isn't sustainable. There's already worry about inflated valuations of some "unicorn" companies -- private companies worth $1 billion or more -- and if VCs keep scooping up cash at unprecedented levels and pouring it into those unicorns, the companies' price tags will continue to go up.
"If you continue to raise capital, from a VC perspective, at that same pace, you start to really get nervous," Tarhuni said. "You start to see more artificial inflation."
Meanwhile, Silicon Valley startups also raised less money last quarter -- they brought in almost $6.9 billion, down from nearly $9.9 billion the quarter before, according to the Venture Monitor report. But they're raking in more cash than they were a year ago -- in the third quarter of 2016, local companies raised just under $6 billion.
Continuing an ongoing national trend, much of that money is going to a handful of massive unicorn companies, leaving some smaller startups out in the cold. So far this year, 5,811 U.S. startups have raised $61.4 billion. That puts 2017 on track to see the highest sum of VC dollars invested in a decade, but the lowest number of deals since 2012, according to the Venture Monitor report.
Those numbers show that deals keep getting bigger, but fewer companies are getting a piece of the pie. That's because investors are chasing big names like Uber and Airbnb, hoping for a massive payout, said Paul Hsiao, co-founder and General Partner of Canvas Ventures. New York-based WeWork, for example, closed a massive $3 billion round in August, and that alone accounted for 17 percent of the quarter's overall investment into U.S. VC-backed companies, according to the Venture Monitor report.
"The gaps are widening," Hsiao said. "The perceived winners are just getting more capital than ever."
Much of that money is staying in the private market, as startups continue to put off going public. So far 2017 is on track to see 707 U.S. venture-backed companies price initial public offerings or get acquired by the end of the year -- down from 839 such deals in 2016, according to the Venture Monitor report.
Despite the recent belt-tightening trend, Oakland-based Roofstock, which operates an online platform that lets real estate investors buy and sell properties already full of tenants, had no trouble raising $35 million earlier this month. The company wasn't even planning to raise more cash until next summer, but there was so much interest from investors, that the leadership decided to go ahead and close a round of funding early, co-founder and CEO Gary Beasley said.
At least in Roofstock's industry -- housing and financial services technology -- there's no sign of a venture capital slowdown, Beasley said.
"In our sector, I have the sense that they were going full-speed ahead," he said, of the investors he spoke with. "We had multiple firms who were interested in leading this round."
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