News Column

Venture Capitalists Doubling Down on Early Stage Software Companies

July 19, 2013
tech

Good news if you're a Silicon Valley entrepreneur: Venture capitalists are pumping more money into early-stage startups.

The latest MoneyTree report, compiled by the National Venture Capital Association and PricewaterhouseCoopers, found that venture investments in early-stage companies rose to their highest level in six quarters. VCs invested $2.5 billion in 480 such deals nationwide, healthy upticks over the previous three months.

While bets on the youngest, "seed stage" companies continued to drop as VCs cede much of the risk to angel investors, the combination of seed and early-stage deals represented 57 percent of all venture activity in the most recent quarter.

What's more, the number of companies at any stage of development that took in venture capital for the first time climbed by double digits compared with the beginning of the year.

Mark McCaffrey, the San Jose-based head of PwC's global software practice, said the numbers reflect a growing tolerance for risk on the part of VCs.

Whereas venture firms last year increasingly shifted toward late-stage companies with a better chance of going public, McCaffrey said the recent strong performance of enterprise software IPOs has VCs looking upstream. "Their reaction is, 'I need to get in earlier if I'm going to maintain my positions as the values go up.' "

Also driving valuations upward is a healthy market for mergers and acquisitions.

"All of the old-school

software companies have a lot of cash," McCaffrey said. "What they don't have is disruptive technology."

John Taylor, research director of the venture capital association, said that as enterprise customers continue to move away from buying pricey software licenses to more flexible, cloud-based models, entrepreneurs will have more opportunities to disrupt markets long dominated by entrenched players.

VCs are clearly in agreement, based on how much money is moving into software startups.

Software continued to be the most popular investing sector in the past three months, according to MoneyTree. Even though the dollars going into software dipped compared with the previous quarter -- something Taylor attributed to normal funding fluctuations -- software companies reaped 35 percent of all venture investment in the first half of this year.

"As a share of total dollars, it's really at record-high levels," Taylor said.

Half of the 10 largest funding deals of the quarter went to software companies, and biotech landed some big-ticket investments as well. The strength of those two industries helped offset the fact that funding dipped in eight of the 17 industry sectors the MoneyTree report tracks.

Computer hardware and semiconductors were among those in decline. And cleantech continues to tank, with its sixth straight quarter of funding declines.

NVCA President Mark Heesen -- overseeing his last MoneyTree report as he prepares to retire after nearly 15 years -- said the heavy preference for information technology investing reminds him of the late 1990s. To a point, anyway.

This time, he said, "There will be no tech bubble. IT investing will continue to be the bedrock of the venture industry -- but at sustainable levels."



Source: (c)2013 the San Jose Mercury News (San Jose, Calif.). Distributed by MCT Information Services.