Venture Capital Hits $19 Billion Record

Venture capital investments in private companies just set a 15-year record.
The Wall Street Journal reports that venture capital firms poured $19.2 billion into U.S. companies in the second quarter of 2015. That was within striking distance of the $19.7 billion raised in the final three months of 2000.
This level of venture capital funding marks a 24% increase from last year.
More money is pouring into privately held companies. But there is one major difference between today and the dot-com boom of the late 1990s.
Back in the heyday of the Internet bubble, more companies were getting funded. For example, 1,309 deals were financed in the fourth quarter of 2000. Yet last quarter, the number of deals declined 21%.
How is it possible for funding levels to rise rapidly, with fewer companies receiving investments?
Simple. More and more money is flowing into “mega-deals.” This describes companies that are raising more than $100 million in a single round of financing.
This includes companies like Uber, which raised $1 billion in late July. Or Airbnb, which raised $1.5 billion in June.
Most of these companies belong to something that The Wall Street Journal calls “The Billion Dollar Startup Club.”
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Today, the most promising growth companies are staying private. Venture capitalists, private equity firms and hedge funds are willing to invest hundreds of millions of dollars in these companies before their IPOs. I like to call them pre-IPOs, since these companies are nearly certain to go public in the coming year or two.
It’s a stark contrast to the dot-com days.
Amazon (NASDAQ: AMZN) went public in 1997. At the time, the company was valued at just $440 million. The Amazon IPO raised $54 million of capital for the company.
That was the norm at the time. A company would raise $10 million or $20 million privately, and then IPO and raise $50 million or $75 million.
Today’s top venture-backed companies are simply choosing to stay private longer. The benefits are obvious.
First, the company doesn’t have to disclose financial information if it remains private. Second, the founders retain greater control. Third, it’s more difficult for employees to cash in their stock options and walk away. And fourth, the execs aren’t bothered with the hassle of running a public company and responding to Wall Street.
With huge amounts of capital available, investors have also decided that staying private is a good deal. Doing so limits investments to only accredited and institutional investors. That gives select investors preferential access to the best deals, while shutting out the general public.
This is all good news for the company, their founders, and institutional investors.
But this is bad news for the 97% of Americans who aren’t accredited investors. To be “accredited,” you need to have $1 million of liquid net assets or earn $200,000 per year individually ($300,000 per couple). Even those who meet the requirement typically can’t access in the top venture-backed companies.
That means the best growth companies and biggest profit opportunities – including Airbnb, Dropbox and Uber – have been completely off limits … until now.
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