With an increasingly high number of competitors in Silicon Valley, startups remain skeptical on how to get their projects off the ground. Nonetheless, institutional investors aren’t being hesitant on supplying venture capital firms with billions of dollars. In fact, VC’s have received the most funding in this year alone compared to any other period since 2006.
According to data from the National Venture Capital Association and Thomson Reuters, nearly 60 firms in the U.S. accumulated $12 billion in Q1 of 2016. Compared to Q1 of 2015, that’s an increase of 59%. However, institutional lenders aren’t willing to put their eggs in more than a few baskets.
Fund records indicate that nearly half of the new capital investments were closed by only four California-based enterprises. The Founders Fund received $1.3 billion, Norwest Venture Partners locked in $1.2 billion, Accel partners were granted two funds totaling $2 billion along with Lightspeed Venture Partners closing two funds as well equalling $1.2 billion.
To many, this trend comes as a shock given the scarcity of IPOs and the humbling performance of tech stocks. However, there may be some contributing factors hidden in plain sight.
Firstly, with more money comes more opportunity and the public market has been performing exceptionally well allowing institutionalized entities access to more funds. These resources rain down on VC’s because institutions have more capital than they know what to do with. When big institutions have more funds at their fingertips, they do what they do best: invest. Fortunately, VC’s are at the receiving end which ultimately trickles down into the pockets of aspiring startups.
Secondly, the Fed has kept the rates of interest considerably low. Although they increased interest rates in Q4 of 2015, they have publicly rejected negotiating a raise until June of this year.
Investors from abroad are also playing a role in this. Specifically, Chinese entities who have been on the radar since 2014. 2 years ago, investors from China spent $14 billion on U.S. acquisitions and $17 billion in 2015. Last year, this number spanned over 110 deals closed between foreign partners. Think that’s impressive? Just in Q1 of 2016 alone, Chinese entities have purchased 36 U.S. companies totaling $39 billion. That’s over a 50% increase just in the first quarter. In addition, an attendant from this year’s Founder’s Fund Annual Limited Partner Meeting claimed he was approached by dozens of Chinese investors. Many of whom were seeking formal introductions or the personal information of specific founders.
Lastly, institutions are playing chess not checkers and maneuvering with tact knowing that venture investing eventually moves in the opposite direction of the economy. In other words, investors are strategically beating startups to the punch before an anticipated surge of IPOs blow up somewhere down the line.
Investing in VC’s is bittersweet because it often indicates that private markets are under pressure. This could be trouble for larger companies but also makes investing in VC’s a smart choice. This double-edged sword could potentially safeguard investors from financial ruin while simultaneously creating them bigger and better opportunities.