July 23, 2007

VC Investment Hits Highest Level Since 2001

Duncan Riley

32 comments »

Data due to be released by Ernst & Young and Dow Jones VentureOne today shows that investment in information services companies, including Web 2.0 startups, hit $979 million in the second quarter of 2007.

The figure is 52% up on the same period last year and the highest figure recorded since the 2001.

In laymen’s terms, we are now officially in a boom; not that we’d probably need figures to prove this.

For those who may prophesize that the figures foretell an impeding crash, data released earlier in July showed that IPO’s for the entire Information Technology sector (which includes hardware, semiconductors and communications companies as well) totaled 10 for the quarter, and 17 year to date vs a peak of 41 IPO’s in the first quarter of 2000 and 106 in that year. $11 billion+ was raised by IT related IPO’s in 2000 vs $2.4 billion year to date. The hype of the dot.com bubble is not being repeated on equity markets.

(in part via MSNBC)

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Comments

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gettit

July 23rd, 2007 at 12:21 am

I think part another part of the IPO difference if due to Sarbanes-Oxley in 2002. The additional liability probably makes the entire idea a little less desirable.

I think it sucks, personally. Markets in Hong Kong and London, though, are plenty happy to pick up the slack (and cash) until we come to our senses.
gettit

July 23rd, 2007 at 12:22 am

“I think another part of the IPO difference is due to Sarbanes-Oxley in 2002.” Geez, I am sorry for the grammar and waste of space.
Search*Engines WEB

July 23rd, 2007 at 12:25 am

One has to wonder how much AJAX, Web 2.0 and Consumer Broadband affordability as well as increased PC technology - all advancing together at the right time to contribute to this new boom.

The World Wide Web boom of 1999 was more software based - now, it is software as service - based.
Jay (living in First Life)

July 23rd, 2007 at 1:09 am

Party like it’s 1999.
Michael Vu

July 23rd, 2007 at 2:00 am

Go Web!
Noah

July 23rd, 2007 at 5:14 am

That is awesome. This is a great time to be alive and doing business on the web!
ChucksJob

July 23rd, 2007 at 5:43 am

What makes this especially important is that this growth is combined with the trend of many companies not taking, or slow to take, VC funding. Startup costs are lower than they’ve ever been, while we’re at full employment there’s still plenty of talent, and bandwidth costs are dirt cheap and bound to get lower as dark fiber continues to come online.

Why is this happening, and why now? I’d read somewhere of sunset clauses where VCs have to put the money somewhere or return the funds. Perhaps this is part of it, but I think it’s because VCs continue to perform the function of ‘gatekeepers’, persons who provide contacts, leadership, and direction in an industry of youth, and are working harder at it now than they have since the end of the last bubble in 2000.

Offering a fat wallet is one thing, but having a fat rolodex is very important (in my opinion just as important) to a startup. Execution is the only thing that matters in the startup world, and VCs make that possible, and not just with money. The growth of VC investment money provides a tangible marker to say that the VCs are working harder lately to create real companies. The increased investment is a sign that the VC industry has recovered, finally having fully stripped out those VCs that jumped in for the last bubble, and are now competing for ideas by offering their true value - contacts, experience, growth potential.

I don’t think we’re in a boom of money, and certainly not in a bubble. We’re in a growing pond of contacts, and we’re seeing the efficiencies of the greater social interactions that the internet provides. Internet startups, through reduced costs, recovered long ago from the bubble, but the VCs are just now getting their act together again.

Does that make sense to anyone else?
Prescott

July 23rd, 2007 at 5:46 am

Duncan,

Measuring equity speculation by IPO’s and concluding that we’re not on course for a “crash” is flawed logic. This time around it’s the private equity companies and strategic buyers (large, established companies) that are buying equity at crazy valuations. If About.com was once valued at $105 per share, is that really any different than MediaBistro.com being bought for $23 million on revenues of $5 million or $6 million?

I think there is tons of speculation in the Web 2.0 area, and anyone working in M&A would tell you that they are worried about that. The multiples that dot-com’s are asking for is eerily reminiscent of inflated P/E ratios in the stock market.

I think the business models for most of these companies are a helluva lot better than the last time around, but how do they deliver on the expectations under which they are bought? Perhaps this time around, the “crash” is less stock market driven and more jobs driven. Somehow, all of this speculation will impact folks.

P
heri

July 23rd, 2007 at 6:12 am

at #7 (chucksjob) you make it sound like VCs are the most important factor of success for the company. i think it’s fundamentally wrong. it’s the product, the execution, and the founders who make the difference. VCs make the business have a faster adoption rate, that’s all.
ChucksJob

July 23rd, 2007 at 6:23 am

#9 - Heri

I think we’re saying the same thing. For a period, pre-2000 particularly, they weren’t the most important factor, except for cash. They’re performing better because they’ve learned that lesson. For the purpose they serve - which is not the buckets of cash - they’re better than they’ve ever been, and they the growth of funding reflects that. It’s not a boom, it’s a natural outcome of the maturation of the funding market, based on there being more money. Everyone is smarter now.

I also agree with #8 Prescott that private equity, from university pension funds, etc., is a concern, and that some are not making good investments. However, this creates good competition within the equities markets that makes every player better. Startups chasing cash will turn to sources with nothing to offer but easy money looking to gamble. Right now, (and this hasn’t always been so) the VCs are the better tool for longer-term growth.
BeingParents

July 23rd, 2007 at 8:41 am

It does not appear to be Bubble 2.0. Today, most start ups realize the importance of having and bullet proof business model/plan. Investors are experimenting/evaluating the technologies they are investing in.

The day of “its gonna be blah….blah…and more blah blah” are over. RIP blah..
jake

July 23rd, 2007 at 8:44 am

We prefer afluent Angel Investors.
http://www.MyCancunTV.com
Buxr.com

July 23rd, 2007 at 8:52 am

Best part of VC funding is the free coverage on Techcrunch!
patricia

July 23rd, 2007 at 9:41 am

I agree with Prescott. I think we’ll see somewhat of a crash, personally, but probably not nearly as bad as the last time around. Companies were outright stupid last time - spending money they didn’t have on foolish things, expectations that wouldn’t possibly be met due to all kinds of factors, from being too early with an idea (some would have been awesome now) to simply having too big of expectations. It was crazy.

The last time around, companies were playing in different areas (infrastructure, software, etc.) and in dark, unchartered waters so you can credit some of the problems to that, I’m sure. It’s better this time around, but I don’t know that it has anything to do with anybody having better business models. I was stunned to see some of the things investors put money into the last time around and am just as much with a lot of things today.

Only time will tell.
vaspers the grate

July 23rd, 2007 at 9:43 am

I’m hoping to drive VC capital to Justin.tv with my “Vaspers Presents: Web 2.0 Trash Talk” show, every night at 7:00 PM CST.

It premiers tonight.

I like how Justin.tv is net art, something I have studied for a long while now. Where will the monetization occur? First: compelling content.

My original computer music will provide the ambient alien background most suited to Prophecies from Andromeda to Earth Web material.

I will mention the TechCrunch/Conduit free custom toolbar in the midst of my rants and reviews, since I think it is a powerful marketing tool. I use it for myself and 3 or 4 clients of my employer. Am including it as an undisclosed Free Prize Inside for all clients, as matter of policy.

http://justin.tv/vasperspresents
No Surprise

July 23rd, 2007 at 9:48 am

@Chucksjob,

You give a good analysis, however you’re giving the VC community in general too much credit. It has already been well documented and reported that most VC’s haven’t earned a penny. A handful of the top firms account for almost all of the industry profits. This said, most don’t have the “right rolodex”, or relevant “operating experience”. They all have the cash, but the handful of firms with the “right rolodex” and relevant “operating experience” yield successful businesses that they fund. The others fund over investment, whether or not the start up has a good technology, business model, or founding entrepreneurs.
Joe

July 23rd, 2007 at 10:34 am

@ No Surprise:

Thank you for some sanity. I could not agree more. The VC “community” in general gets too much credit. Yes, there are a few firms that actually have the Midas Touch, but for the most part, they live off the management fees from their funds and pray (like the rest of us) that their investments pay off and at least keep them employed. As an industry, their rate of return barely justifies the risk. Unless you’re in with Benchmark and the other A+ players etc, you’d do better to buy a no-load mutual fund which tracks the major indices.

Essentially, the VC industry is organized gambling. Make ten bets, know one will go through the roof and pay for all of them and perhaps more, another two will do ok, and the other seven will tank. Easy to make big bets if it’s not your money and it’s your job to make those bets, no? These guys are skilled at raising money, negotiating term sheets and taking advantage of any leverage they can get. And they perpetuate all this despite consistently delivering mediocre returns for their investors.

That having been said, they do have a vital role in our economic system; I just laugh when I hear people talk about them as if they are doing something extraordinary. They are just executing a formulaic business model. All that talk about “rolodex help” and “operational guidance” and “strategic thinking” is just a sales pitch. The odds are the odds and they are playing them.

The real innovators, risk-takers and value-adders will always be the entrepreneurs.
David Litsky

July 23rd, 2007 at 10:36 am

Follow the cash. Too much of it is flowing into startups and not enough is flowing back out. I also worry about the control expected by the VC firms and how it may limit the creativity of the founders.

The private equity market as a whole has overextended itself and while the web startups may be a contributor, they won’t be the sole reason. The benefit to the web startups is that they have relatively low operating costs and can weather a downturn in the economy if their product is as good as they claim.
Antje Wilsch

July 23rd, 2007 at 10:57 am

I talk to a lot of people who are in the VC request circuit right now, and IPOs are not being discussed much. Acquisitions are. I thought with VMWare and the few others that there might be some more activity around it but the people going thru the rounds are saying not so much - it’s still about acquisition as best exit. Who’s going to buy all these companies?
ChucksJob

July 23rd, 2007 at 11:40 am

No Surprise:

>> You give a good analysis,
Thanks!

>> the handful of firms with the “right rolodex” and relevant “operating experience” yield successful businesses that they fund…

I agree. Those startups who just want cash can find it with many VCs and angels. Those who recognize that a VC is a stepping stone to something more will leverage the lowered costs of the web industry today in order to hold out for the better VCs. Let’s face it, there’s virtually no long-term viable web companies that haven’t passed through the VC stage. The hope is that startups take it as a stage, and not a goal. That’s certainly the case with mine. I have other web properties that earn my living, leaving me free to develop the one for which I’ve applied to TechCrunch20. I went for TC20 mainly for the contacts and the ideas, not the money. Really. I mean that.

The lack of quality startups willing to accept money just thrown at them, combined with a pool of money that has grown because of the natural market efficiencies tells me these things, 1) we’ll soon see management consulting firms enter the market in the role that VCs (should) play, as advisors, board members, and taking a percentage for services but not supplying money, and 2) founders ‘tokenizing’ the VC process, as we see with the recent effort to charge people to see betas. Both of these are threats on the VC horizon, and they should be scared.

As to ‘non-quality’ startups, I suspect there’s no end to those. I’d enjoy seeing Arrington’s email for one day, just to see how much junk flies by. These people will take anything, and so far seem to be sopping up the extra money without harm.

Antje Wilsch:
>> Who’s going to buy all these companies?

You got that right. The IPO market simply hasn’t opened up anywhere near what it was ‘97-’00, and that’s why I say we’re certainly not in a bubble. But ultimately, there’s got to be an exit strategy for every investor. I’m hoping Yahoo’s efforts to restructure succeed, and cause them to look at more aquisitions (hint, hint).
Roger

July 23rd, 2007 at 11:50 am

wow…. web business is great
vaspers the grate

July 23rd, 2007 at 11:55 am

Making so much money, I tear it up and sprinkle it in side salads.
Fabian

July 23rd, 2007 at 1:14 pm

As long as VCs let companies that need to die, die, all should me more less OK!!
Marc

July 23rd, 2007 at 1:43 pm

To paraphrase Twain, “History doesn’t repeat, but it rhymes.”

Here’s hoping for one hell of couplet. I figure we’re exactly 10 years apart from the past boom. That puts us in the summer of 1997. Four more years! Four more years!
Sam Purtill

July 23rd, 2007 at 4:04 pm

YES… I’m going to go start a company, raise a few million on an absurd valuation, hire hundreds of employees, buy a Lamborghini, a few vacation homes, etc. And then when the company IPOs I’ll short all my shares and walk away a billionaire!

/sarc
Rajesh

July 23rd, 2007 at 6:45 pm

One side social networking is growing drastically and other side one guy blogs on the mails he receives. He calls his blog as “Mails I Read” http://www.mailsiread.com . People come up with simple idea and people like it.
Paul

July 23rd, 2007 at 7:43 pm

Maybe I should take my projects to a VC instead of self-funding them
Philip Wen

August 5th, 2007 at 10:44 am

This time around, it appears that it’s not the same models driving the tech explosion as the one that happened at the turn of the century. Unlike the last explosion, where growth of the web centered around taking traditional business models online (groceries, merchandising for example), this time the growth is focused on content generation and aggregation. With the advent of web technologies, explosive growth of user generated content, and lower barriers to entry afforded by virtualization and broader web expertise, startups this time around are concentating on a much smaller profit generation channel - ad revenues generated by glued eyeballs. Most companies nowadays take on the attitude that as long as you can get loyal users, you have a valid business model. What most people don’t realize is that the online advertising industry is still small in comparison to traditional advertising, and even though the industry is growing, growth in available ad space is outstripping the money available in the online ad industry. Can all these companies possibly reach profitability with the ad-driven revenue generation pie being chomped at the bits from every direction? I guess we’ll see if all this will turn into Bubble 2.0 - Just how effective will these ads be? Will key metrics such as CPM retain its value in 10 years? Only time will tell.

Philip
http://www.philipwen.com