Valley venture capital investments continue at record pace

Silicon Valley investors poured more money into health care startups and hot consumer apps such as Uber and Airbnb during the second quarter of this year, making the spring months the biggest in dollar volume for venture capital spending than any quarter since 2001, according to a Dow Jones report released Thursday.

Venture capital investments in the San Francisco Bay Area hit $7.4 billion, a $1.13 billion increase over the first quarter of this year — which until now had been the largest quarter since the dot-com peak — and a 127 percent increase over the same three-month period a year ago, according to Dow Jones VentureSource, a quarterly report on venture capital investments. At this pace, 2014 could become the biggest year for venture capital investments since the dot-com boom.

The record-setting quarter comes despite a drop in software investments, the sector darling in Silicon Valley and an industry that last quarter outpaced any other. But VCs pulled back on software companies this quarter, with investments dropping 38 percent to $1.3 billion.

Jeffrey Grabow, an analyst who leads venture efforts at research firm Ernst & Young, isn’t worried about that drop.

“It’s healthy to have pause,” he said. “I don’t think anybody is out there saying IT is doing poorly.”

He added:  “The more money you’re able to exercise balance with, the less likelihood there is of entering into a bubble.”

Where VCs did dump their money was health care startups, including biopharmaceutical, medical device and medical software companies; the sector raised a combined $1.07 billion, a 94 percent pop from the first quarter and more than any previous quarter for at least five years, according to Thursday’s report.

“And that is going to continue to be a long-term trend when you look at how complex the human body is,” Grabow said. “We’ve got this large opportunity, applying technology into helping physicians do things at the patient level and at the back-office level.”

Some of the valley’s most popular consumer services continued to demand big VC money. Five of the top nine deals for the quarter — each of which notched $100 million or more — were consumer service companies. They include Uber, which raised a whopping $1.2 billion; followed by Airbnb, which raised $450 million; Pure Storage, a data center and storage platform for businesses which is also heading towards an IPO, raised $225 million; and Pinterest, with $200 million.

VCs continue to invest fewer rounds of funds, but each of those rounds are larger than they have been in the past, Grabow said. There were 323 deals for the second quarter, compared to 337 in the first quarter. And most of the capital is going to late-stage companies, such as Pinterest and Uber, that generate revenue and show promise of being profitable in the future. The trend is a flip-flop from the dot-com boom, when investors poured money into early-stage Internet companies before they had made any revenue.

“Now the situation becomes can (companies) raise more money and capture more market share and put up bigger walls competitively to lock in their future,” Grabow said,

Once again, the Bay Area and California led the country with total venture funding, accounting for 54 percent of the $13.8 billion in deals nationally. It was followed by New York, Massachusetts and Washington. Of the seven largest deals in the country for the quarter, all but one — power company Boston Power Inc. — were in Silicon Valley.

Valley VC firms with the largest deals were GGV Capital and Iconiq Strategic Partners.

 

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