Venture capital boom raises bubble concerns | Business| Economy and finance news from a German perspective | DW | 16.01.2015
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Venture capital boom raises bubble concerns

Last year, venture capital investments in startup companies reached a level last seen during the dotcom bubble that burst in 2001. Some experts are already warning that the funding boom has led to excess valuations.

According to new data released by the National Venture Capital Association and PricewaterhouseCoopers (PwC), with data from Thomson Reuters on Friday, venture capitalists poured a staggering $48.3 billion (41.5 billion euros) into startup companies last year.

This was an increase of more than 60 percent from the previous year, the three companies said in their "Money Tree Report," and the biggest total since 2000 when $105 billion was poured into new companies at the height of the dotcom bubble.

The $48.3 billion were spent on 4,356 venture deals, which was just about 4 percent more than in 2013. However, the value of those deals was much higher, and included 47 "mega deals" with investments of more than $100 million - almost twice as many as in 2013.

"We've never talked about this level of fundraising before," said Mark McCaffrey, who leads PricewaterhouseCooper's global software practice. "This points to a dynamic change in the market."

Software promises

Software and biotechnology companies were the leading recipients of venture funding in 2014. Investors put $19.8 billion into software deals, or 77 percent more than in 2013. The second leading sector, biotech startups, raised $6 billion or 29 percent more.

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The two biggest deals were separate rounds of investment in Uber Technologies, the controversial ride-sharing service, which is now valued at $41 billion. Each round was pegged at $1.2 billion. Other major deals included $542 million invested in Magic Leap, a secretive startup working on virtual reality technology, and $500 million in Vice Media, which operates online news and video channels. Some $485 million in venture capital were invested in SnapChat, the popular messaging service.

McCaffrey said last year's surge shows investors increasingly believe tech companies are capable of succeeding quickly on a global scale, which means they are poised to reach vast markets and reap sizable revenue. He also noted that new kinds of investors, including private equity or hedge funds, and the corporate investment arms of major companies, are now vying with traditional venture capital firms to back promising startups.

"What we're seeing is healthy competition for these deals, which can drive them up to be frothy," he added.

Bubble concerns

However, there are also prominent voices, including some who have invested in companies, who are urging caution about the funding boom.

In September, venture capitalist Bill Gurley, who invested in Uber, warned that the startup community was "taking on an excessive amount of risk." And the US Federal Reserve said in July that valuation metrics such as revenue-backed growth in startup sectors "appear substantially stretched."

Mark Cannice, professor of entrepreneurship at the University of San Francisco, told news agency AP that the main concerns weren't for the viability of businesses, but what investors were currently paying for them.

uhe/sgb (Reuters, AP)

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