Venture Capital Funds Reach Dotcom Era Levels

The good news is that investors still believe in the rewards of risk.

The bad news may be that they don't see any other opportunities in the economy capable of delivering acceptable returns - and that this may mean that tech valuations will once again become unsustainable while the macro economy falters. JL

Eliot Brown reports in the Wall Street Journal:

The influx of capital has helped startups stay private longer with money that in past eras would have been raised on the public markets. Last year, U.S. venture firms raised 30 funds totaling at least $500 million each. That is up from 17 in 2015 and the most in a year since 2000 when there were 54. “It feels like people are saying, we want to double down on the winners.” Those returns, however, are mostly on paper since so few startups are holding initial public offerings,
Giant venture-capital funds are piling up in Silicon Valley, a sign that foundations, pension funds and endowments are still willing to rush money into the risky startup sector despite lingering concerns about overheated valuations.
The latest firm to raise a jumbo-size fund is Canaan Partners, a fixture on the venture-capital scene that collected $800 million for new investments in tech and health-care startups. Canaan’s 11th fund is the largest in its 30-year history, up from $675 million three years ago, it says.
Canaan’s new war chest furthers a trend since early last year of venture funds ballooning to levels not seen since the dot-com boom. The influx of capital has helped startups stay private longer with money that in past eras would have been raised on the public markets.
Last year, U.S. venture firms raised 30 funds totaling at least $500 million each, according to Dow Jones VentureSource. That is up from 17 in 2015 and is by far the most in a year since 2000 when there was 54.
Through the first half of this year, there were eight such megafunds recorded by VentureSource that collected a total of $9.3 billion, which represented about half of the entire sum of capital raised by 302 venture-capital funds. The median fund size is generally around $100 million.
Fund managers raising outsize funds over the past year include venerable firms such as New Enterprise Associates and Technology Crossover Ventures, which raised $3.3 billion and $2.5 billion, respectively, both their largest to date.
“It feels like people are saying, we want to double down on the winners,” said Maha Ibrahim, a managing partner at Canaan. “It’s a very active environment.”
The influx of money from so-called limited partners—the foundations, pension funds, endowments and other big money managers that invest in venture capital—suggests investors hope the startup frenzy of recent years will march on.
Investment returns in recent years have been notably strong amid a low-interest environment, thanks to startup valuations soaring to new heights. As of July, 100 U.S. startups were valued at $1 billion or more, about triple the number from three years ago, according to The Wall Street Journal’s Billion Dollar Startup Club.
Those returns, however, are mostly on paper since so few startups are holding initial public offerings, the main vehicle for venture firms to reap big profits. The lack of appetite from the public markets spooked venture capitalists, pushing startup funding down 29% to about $55 billion last year, according to VentureSource. Investment in venture firms, meanwhile, rose 18% to about $44 billion last year, the most since the height of the dot-com boom.
Ms. Ibrahim said Canaan’s existing investors collectively wanted to invest about 50% more money than the last fund while new investors were eager to get in, leading to demand well in excess of the $800 million.
“We’re looking to invest with the best managers that are likely to outperform the public markets and their peers,” said Amanda Outerbridge, a principal at HarbourVest Partners, a longtime Canaan investor.
Two of Canaan’s past three funds have so far delivered returns at or near the top 10% of venture-capital firms tracked by investment adviser Cambridge Associates, according to data provided by Canaan. A third fund has generated middle-of-the-road returns.
The Menlo Park, Calif., firm was formed as a spinoff of General Electric Co. in 1987, initially funding small bets in biotech and a once-tiny computing sector. It has remained in both industries, with about 60% of its capital earmarked for tech in areas like online marketplaces and fintech, and 40% devoted to pharmaceuticals and medical technology.
Among Canaan’s best recent investments are early bets on LendingClub Corp., which went public with a $5.4 billion valuation before beginning a long slide in its share price, and grocery-delivery startup Instacart Inc., which was valued recently at $3.4 billion.
Canaan stands out in another way: Its partners, and the founders of the companies it has invested in, are noticeably more female than average in the male-dominated industry. Three out of eight of its managing partners are women, while it says about 25% of its companies in the past few funds have a female founder or chief executive.