The beginnings of a VC renaissance?

In the Spring, I considered the question of whether now was the ideal time for LPs to be allocating to venture capital. Last year saw just $16.9 billion flow into venture after the boom years like 2000 when a whopping $100 billion flowed into VC. Uncertain returns and tight capital markets that resulted from the financial crisis made exits difficult in the years that followed the Great Recession. Not surprisingly allocation to VC suffered with CalPERS, the second biggest pension fund the U.S. committing to just four private equity/VC funds in 2013.

But there was a strain of thought that suggested that while VC had been heavily overcapitalized, it was rightsizing. And I argued that with less VC money out there, there was also less cash chasing deals, which would suggest better valuations for VCs.

Reuters peHub reports that the first half of 2014 fundraising for VCs was at an eight year high of $17.3 billion. An additional $4.3 billion came in during the first seven weeks of Q3, bringing 2014 to a healthy $21.6 billion. Expectations are now that 2014 VC funding could reach a solid $25-$30 billion range.

Part of this may well be an overall improving economy as better returns for LPs in their entire portfolio make them more open to taking risks associated with VC. Improving capital markets also point to better exits for startups. In fact, some of the concern is already about a bubble as late stage valuations have some investors balking at the prospect of leaving so much value with the startup and less with the investors.

peHUB points out that some of the uptick is a result of fundraising at very large funds like Andreessen Horowitz and Accel Partners. So there may be some lumpiness in the numbers. And we may need to see more distributions to LPs to warrant an influx of new capital. But LPs would be wise to monitor fundraising versus distributions in VC because as venture capital rightsizes there is a very decent argument that venture firms will be able to invest in good startups at reasonable valuations, just as capital markets ease.

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Adam Lesser

Analyst Gigaom Research

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