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Capital for Veterans - Venture capital jumps, but bubble may be building

Posted by Michael Horn on Fri, Jan 29, 2016 @ 04:18 PM

We discuss veterans access to venture capital funding during one of our financial modules. This is one of many forms of funding available for veteran entrepreneurs to seek out as part of their funding strategy. In this article Urvaksh Karkaria, Staff Writer for the Atlanta Business Chronicle, shares the status of venture dollars. Read on to see that investment remains high but the pace may be slowing. Entrepreneurs must understand the current and future market when developing a funding plan and modify that plan based on the market.

Karkaria writes - Venture dollars raised by Atlanta companies spiked 50 percent in the third quarter from the same time last year, putting 2015 on track to be the strongest since 2002.

Georgia companies drew $76.9 million in venture funding in the third quarter, compared with $50.2 million a year earlier, according to the MoneyTree report, published by PricewaterhouseCoopers LLP and the National Venture Capital Association, based on data from Thomson Reuters. Georgia ranked 18th out of 41 states that received VC dollars in Q3.

Nationally, venture capitalists invested $16.3 billion in 1,070 deals in the third quarter. That compared with venture capital investment of $10.4 billion across 1,077 deals, a year ago. Q3 marked the seventh consecutive quarter of more than $10 billion of venture capital invested in a single quarter, according to PwC.

Even so, the venture industry is expected to face headwinds. Nationally, Q3 was the slowest fundraising quarter for venture firms since Q3 of 2013, said John Nee, partner in PwC’s Atlanta technology practice. The amount of dollars committed to venture firms fell 59 percent from Q2 to Q3 this year, while year-over-year commitments were down 33 percent.

The pace of venture-backed IPOs is also signaling weakness. Venture firm investors make a return on their investments when their portfolio companies either get sold, or go public. The number of venture-backed IPOs declined 55 percent in Q3 versus Q2, Nee said.

Atlanta venture firm BIP Capital has seen more venture investing in Georgia in the first three quarters of 2015 than it did in all of 2014, Managing Partner Mark Buffington said. Deal flow at BIP, which is raising a $75 million Fund III, is up about 33 percent year-over-year.

“We are still finding a number of good deals, but we are having to be much more selective with the increase in volume and valuations,” Buffington said.

The VC pointed to the “Californication” of venture investing occurring in Georgia and elsewhere. “Everybody is unicorn hunting,” he said referring to the term for $1 billion companies. “It’s as if everybody is trying to hit the winning venture lottery ticket. That will end badly.”

The rapid acceleration of venture investing in Georgia is a strong indicator of irrational investor euphoria. All that capital sloshing around is raising valuations, which are up about 30 percent year-over-year, Buffington noted. “We are seeing all the classic signs of a bubble — the price of entry is increasing as valuations for early stage companies are much higher than they were a few years ago,” he said. “In some cases, entrepreneurs are pushing back on standard industry investment terms because they are finding clubhouse VCs and wet-behind-the-ear angels to come into their deals on terms that leave little room for error.”

Rising valuation concerns are echoed by Doug Spear, who leads Nelson Mullins’ Atlanta tech practice. Strategic buyers are paying high multiples of revenue, and private equity firms are competing heavily for deals because they have significant cash to put to work, Spear said. “Everyone is concerned about the impact of the volatility of the public markets, the high valuations of private companies and the lack of IPO’s nationally and certainly locally,” he said.

Investment activity appears to be following the standard “acceleration and excitement” phase of the venture capital investment cycle, said Jeffrey Leavitt, who leads the tech practice at DLA Piper’s Atlanta office. Fast technology adoption, increased consumer and business spending, and an active financial buyer market help drive strong exits which, in turn, validate the venture capital model, Leavitt said. While Leavitt expressed wariness of the “continued frothiness” in the tech sector, he noted fundamentals such as historically reasonable revenue and operating cash flow multiples provide some credibility for valuations and investing activity.

Topics: Entrepreneurs, Resources, Vets, VC, investors