Here is the good news – venture capital investments are not increasing at rates which are typically commensurate with bubbles... At least according to a MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association which is based on data provided by Thomson Reuters. Although quarterly investment activity increased 5% in terms of dollars, it fell 11% in number of deals compared to the fourth quarter of 2010 when $5.6 billion was invested in 827 deals.
More ammunition for those who say we aren’t in a bubble - the quarterly deal count represents the lowest number of deals in a single quarter since the third quarter of 2009. However, the first quarter of 2011 is the first time in four years that the amount invested in the first quarter has shown an increase over the fourth quarter investment amount.
But the important factor here is that investment dollars are indeed flowing into tech and other companies at a more rapid rate – but into later stage investments. In other words the companies who are proving they have staying power and can grow over time are able to command sky-high valuations. For example Facebook’s valuation is $80B and was just $50B in January. It was just $9B in November 2009!
And to some degree this makes sense as the money available to start-ups isn’t growing very fast and as such, the potential for a new company to take down Facebook or Twitter with seed funding doesn’t seem too great.
So there is massive pressure of start-ups to grow quickly enough to make an impression on investors. This in turn means startups will have to run lean – which means more use of the cloud. So in a circular way we can expect to see at least most startups embracing the cloud because they just don’t have the access to funding they need to build it all themselves.
What we learn from the current state of the VC market is there isn’t increasing appetite for risk associated with new ventures but there is a higher degree of comfort in the market with regards to investing in companies who have proven they can grow in a competitive funding environment. And it seems we finally have some research which tells us fears of a new tech bubble are overblown. Somehow though, I get the feeling Fred Wilson doesn’t agree.