The Mushrooming of Venture Capital

More money, more markets, more prospects

Maverick Capital, a 20 year-old, classic U.S. hedge fund, is launching its first venture capital fund this month, seeking up to $400 million.  Tiger Global, another well-established U.S. hedge fund, is raising a $1.5 billion VC fund to follow up its prior, early-stage investments in Alibaba (China) and Flipkart (India).

Seasoned hedge funds are not the only newcomers to VC.  Many of the biggest VC investments last year were made by traditional money managers such as Fidelity and BlackRock.  The largest VC fund currently in the market, almost $1 billion, was launched by JPMorgan and not by a proven Silicon Valley VC.

Moreover, the U.S. is no longer the only game in town.  While still the epicenter of entrepreneurial activity, its 61% of VC deals and 62% of VC funding in 2014 were its lowest levels since 2007, according to Preqin.

Worldwide, the total amount of venture funding last year rose to $86.6 billion, a 58% increase over 2013.  The 7,474 global financings in 2014 were actually fewer than the number of VC rounds in 2013, so the average deal was much richer.   A typical Series D or later-stage investment in 2014 – $66.9 million — was twice the size of its 2013 counterpart.   

The biggest beneficiaries of the bump in venture financing last year were not the U.S. and Europe, but China, India and Israel.  Total VC funding outside North America and Europe increased by 160% over 2013.  Five of the 10 largest VC investments in the world last year were made in China (2) and India (3); the other five were in the U.S. 

China and India more than tripled their VC hauls last year to $12.8 billion and $5.4 billion respectively, in each case on fewer deals.  Israel’s VC take was up by 61%, also over fewer deals.  Worldwide, VC deals were generally down in number but up in both total and average values.

For start-ups looking to raise money, the interest from big money managers and hedge funds has been a boon.  In 2014, $100 million-plus VC deals more than doubled the number of mega-rounds in 2013.  Uber, of course, was the VC darling of last year, garnering $1.2 billion in a Series D round from Fidelity, BlackRock and Wellington Management and another $1.2 billion in a Series E round from Qatar Investment Authority, Silicon Valley VC New Enterprise Associates and hedge funds Valiant Capital and Lone Pine Capital.

Edged out of numerous deals by virtue of their relatively small size, pure VCs have responded to the competition from hedge funds and other money managers by investing earlier in start-ups — before the price of rounds skyrockets.  In doing so, they are certainly taking greater risk but, at the same time, they’re increasing the number of early-stage companies being funded and thereby improving the chances of another Google or Twitter.  What remains to be seen is whether the new VCs have the wherewithal to source, incubate and inspire the next one-in-10,000 longshot.

  • Stephen Bornstein

    China just announced it is launching a $6.5 billion VC fund to support start-ups in emerging industries.