US VC firms raised $12.6bn in Q1 2016 – the most for a decade
They’re studying your metrics; they’re holding a red pen and occasionally making notes. You’re sweating. They’re asking how long will it be until you start to deliver real, tangible returns?
It may be of some considerable comfort to startup founders everywhere they they are not the only ones who have to endure a quarterly grilling from the money men. Venture Capitalists have to do it too. Remember, unlike Angels, who invest their own personal wealth, VCs spend as much time trying to secure funds as startups.
Where do VCs find the money? From Institutional funds; pension funds, funds of funds, insurance companies, private wealth managers, trusts – who all expect to make solid returns. And because they have options, institutional funds can afford to be choosy. A VC hoping to raise a specialist tech fund, for example, is competing against corporate funds, hedge funds, equity funds, debt funds, offshore vehicles; the list is exhaustive.
But the good news for entrepreneurs is that Venture Capital funds are raising more than ever before. The investment climate tends to be cyclical – it does not grow exponentially from year to year as we are often tempted to think; just like the stock market it experiences periods of growth and periods of contraction. Progress is not always a given.
So right now entrepreneurs should be celebrating because the more money that VC firms raise, the more they can invest and give entrepreneurs the opportunity to make good on their promises to “change the world”, develop better technologies, create employment and take a major share of the responsibility for global economic growth and security.
This week Tech.eu released its quarterly European Tech funding report; it has been a record breaking quarter, with a total of €4.8 billion raised. Admittedly the data is skewed somewhat by 2 enormous rounds; Spotify’s €910m debt financing round, led by private equity firm TPG, hedge fund Dragoneer Investment Group, and Goldman Sachs, and Africa Internet Groups €300m round, backed by South African Telecoms group MTN, Goldman Sachs again, and start up incubator Rocket Internet Group (the round took place just weeks after AXA, the French insurance firm injected €75m euros), but even without these two (and why should they not be included?) the remaining €3.7bn raised easily matches last year’s Q1 total.
Accel Partners, a VC fund based in Silicon Valley which has invested in the likes of Dropbox and Etsy, announced this week that it has raised a $500m European Tech fund. It’s a vote of confidence in Europe’s tech scene by the US given that 65% of investors in the fund are from the US. Clearly Accel and their backers have been encouraged by previous investments into European tech including Rovio, the makers of Angry Birds, Spotify, and Qliktech, a Swedish firm listed on the NASDAQ.
Scared of your investors? Don’t worry, your investors are just as scared of their investors, but right now they are doing a good job for entrepreneurs
It’s significant that the Financial Times reports that Accel raised the round in just 8 weeks and that it was significantly oversubscribed. The firms previous fund was raised in just 12 weeks after the collapse of Lehman Brothers in 2008. A sign, if ever there was one that investors were abandoning the big banks and preparing to put their trust in entrepreneurs, a trend which continues to this day, and is at least part of the reason for the explosion of the tech and digital startup scene.
“As witnessed over the last year, the fundraising environment for venture capital continues to improve. That’s welcome news for venture capital as an industry but even better for American entrepreneurs who will put that capital to work growing their businesses, hiring workers and driving innovation,” commented Bobby Franklin, President and CEO of NVCA.
And it’s not all about Silicon Valley either; Los Angeles based 1955 Capital raised the largest new fund, of $200m, showing that the LA start up scene is bubbling under nicely. Overall however, the top 5 firms, including Accel and led by Founders Fund IV, LP, which raised an eye popping $1.3bn, were responsible for 43% of the total amount raised.
Like most industries, Venture Capital is a trickle down economy, which is a nice way of saying its hierarchical. Still so long as the VCs keep raising funds in such vast quantities, they will keep investing in entrepreneurs; the trust is there, indeed has been there for half a century or more since the first firms began testing the “Silicon Valley” method in the late Fifties.
And what’s good for the masters of this particular universe, is good for the smaller VC firms selling the product to institutional investors, is good for the portfolio managers, is good for the analysts, is good for the entrepreneurs, their teams, the mentors, the hardware, software, co-working spaces, incubators, accelerators, and coffee and craft beer houses.
Next time you’re in a room facing up to a group of investors, don’t picture them naked, picture them pitching their investors. It’s good to know we’re all in the same boat, staying afloat somehow, amidst all the questions. The hustle is still well and truly on; the world at large is betting on entrepreneurs – don’t let us down!