Venture Capital is Different Now than During the Last Boom

Venture Capital is Different Now than During the Last Boom

Like all markets, venture capital markets have boom and bust cycles.

These days, the industry is in the midst of a boom, with investment hitting levels not seen since the peak of the last cycle, 15 years ago. But this boom looks very different than its predecessor.

Fewer, more financially-oriented investors, managing smaller amounts of capital, are putting their money into later-stage, older companies concentrated in a narrower set geographies and industries, and are exiting more through acquisitions than initial public offerings (IPOs) this time around.

The venture capital community is much smaller today than at the time of the last boom.

The National Venture Capital Association (NVCA) reports that 1,704 venture capital funds were in operation in 2000, but only 1,206 in 2014.

During the last boom, the industry managed more than twice the amount of capital it does today – $331.5 billion (in 2015 dollars) versus $158 billion (in 2015 dollars).

The average fund in 2014 was only two-thirds the size of the average fund at the turn of the millennium.

Venture capitalists are much more likely to be purely financial institution than at the time of the last boom. Corporate venture capital funds – venture capital investment arms of operating companies like Intel and Google – accounted for 24.1 percent of all venture capital investments in 2000, but only 17.6 percent of VC investments made last year.

Similarly, the corporate venture capital fund slice of venture capital dollars has shrunk from 14.1 percent of the total in 2000 to 10.7 percent in 2014.

Venture capital deals have moved to a later stage in the investment cycle this time around.

According to NVCA, 16.8 percent of the venture investment dollars and 9.8 percent of the investments made were in later stage deals in 2000. In 2014, those fractions were 24.5 percent and 19.4 percent, respectively.

Venture capitalists are focusing even more on deals previously invested in by other financiers – business angels, super angels, angel groups, venture capitalists and so on.

In 2000, 72.8 percent of venture capital dollars and 57.5 percent of venture capital investments went into follow-on deals rather than first-time funding opportunities. In 2014, the follow-on fractions had risen to 85 percent of venture capital dollars and 65.9 percent of venture capital investments.

As typified by the media discussion of the mega fundraising rounds of Uber and Airbnb, the number of very large venture financings has increased dramatically. As a result, the valuation of the typical venture capital deal is higher today than it was during the peak of the previous cycle, even when measured in inflation-adjusted terms.

The median pre-money valuation of a venture investment rose from $35 million (in 2015 dollars) in 2000 to $40 million in 2015, according to analysis by the law firm WilmerHale.

Venture capital investments have become much more concentrated in software companies in California. In the second quarter of 2000, the software industry received 25 percent of venture capital dollars. In the second quarter of this year, the industry garnered 42 percent.

In 2000, California-based startups captured 41 percent of venture capital funding, while in 2014, they grabbed 57 percent.

These days, exits are most likely to occur through acquisition, while IPOs were a more common path in the previous book. NVCA data shows that 39 percent of successful venture capital exits occurred through IPO in 2000 but, in 2014, only 20 percent did.

Venture-capital-backed companies are taking longer to exit. The median time to an IPO was 3.1 years in 2000, but 6.9 years in 2014. For exits via mergers and acquisitions, the median time to exit was 3.2 years in 2000 and 6.2 years in 2014.

While the venture capital industry is back in a boom after several long years of a bust, the up cycle is different this time around. In the world of entrepreneurial finance, history morphs as it repeats itself.

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Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.