Venture capital (VC) investment is at a 15-year high and offers no hint of slowing down, says Michael David, managing director for Equity Fund Resources at Bridge Bank.
The second quarter of 2015 saw VC investments totaling $17.5 billion, the most since the first quarter of 2000, which was the previous all-time high. Overall, $50 billion in VC funds were invested in 4,400 companies in 2014 and David expects that figure to be surpassed this year.
One catalyst for the sustainability of this strength in the VC sector is the relative weakness of other markets, David says.
“If you look at the bond market and over the past year, the stock market, they aren’t delivering the returns they once did,” David says. “There is higher risk in VC, but there is a ton of capital chasing good high-potential companies that should help sustain the momentum.”
Smart Business spoke with David about the VC market and what companies can do to stand out with potential investors.
What factors are driving VC investment?
Activity in this sector is strong across the board. Even more important is the tremendous amount of fundraising that is taking place. In the second quarter this year, $10 billion has been raised by VC funds. That’s the strongest fundraising quarter since the last record in 2007 and a 27 percent year-over-year increase.
New Enterprise Associates raised a $2.8 billion fund and IDP Investments LLC raised a $1.3 billion fund just in the second quarter. The Social + Capital Partnership raised $600 million. So far this year, 50 new funds have been raised, a figure which points to some sustainability for the future.
More companies are remaining private longer and not going public because there is so much capital available, both debt and equity capital. Additionally, nontraditional investors have entered the market, particularly for the late-stage, higher profile, ‘unicorn-type’ companies with billion-dollar plus valuations.
It’s a good time to raise capital, particularly for software and media-focused companies.
Which opportunities tend to attract VC investors?
The three big areas of investment right now are software, media and life sciences. Once companies get to the point of needing to raise institutional VC, they need to have a product, early revenue and customers. So you need to be in the right market and there needs to be evidence of sustainable growth.
The really early seed-stage deals are being done by some of the smaller funds, the angel investors. Once they hit critical mass with either a product or some buy-in from customers, that’s usually a tipping point for raising capital.
VC investors want companies that are going to grow fast and take market share or have the ability to create new market share. Everyone is looking for growth. Companies that are me-too companies, or just have mediocre growth are not going to attract a lot of capital.
What’s the key to making a positive impression when you meet with investors?
Present your growth story and a realistic plan for how quickly you can scale the business with a boost of outside capital. VC firms want to see within a five-year window how quickly you can grow the company and create value.
Strong management teams are really important as is a market niche that can be exploited.
These are smart people that dig into the intricacies of the market and the backgrounds of founders and management teams.
They want to see a team that has experience, has built a vision and is able to attract the people needed to build a sustainable company. If things go in the wrong direction or the market shifts, they want to know that the business has the ability to pivot.
What about balancing risk versus reward?
There is willingness to take risks in the early stages and as the business starts to get traction, VCs can continue to fund in multiple rounds to grow it.
But the passion of the entrepreneur and the vision, if it can be validated, is very powerful. If the right team is behind it, it can attract other people and show potential for the future. A clear, well thought out vision is key to the success of any lasting venture. ●
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