Non Traditional Investors Contributing to Increase in Venture Investing

November 12, 2014

Despite a subdued third quarter in which venture capital investment decreased by nearly 30 percent from the second quarter, the corresponding figure for the first nine months of this year has already exceeded that of full year 2013. According to a report from PricewaterhouseCoopers and the National Venture Capital Association, venture capital investment in the first three quarters this year has crossed $33 billion, comfortably above the $30 billion venture investment in all of 2013. The sharply higher venture capital investment is a result of the emergence of non-traditional investors such as hedge funds and mutual funds into the venture investment scene.

Hedge Funds Investing In Start-ups

Typically most start-up companies get their funding from pure vanilla venture capital firms. But in recent years there have been instances of start-up firms disrupting entrenched industries, and in some cases, creating new industries. This emerging trend has caught the attention of non-traditional venture investors who see potential for big returns through start-ups.

One of the prominent hedge funds to enter venture capital investing is the New York based hedge fund Maverick Capital which manages assets worth approximately $9 billion. Lee Ainslie III, who is the founder of the firm, is making a pitch to raise $400 million for the firm’s first venture capital fund. Lee says that his firm is seeing the best opportunities in a long time for making early-stage investments in private companies. His venture fund will focus its investments on young private companies in healthcare, consumer and software industries.

Investing in start-ups is rare for hedge funds which typically invest in stocks and other publicly traded assets. That said, Maverick Capital is not the first hedge fund to get into venture investing. New York-based Tiger Global, which started as a hedge fund, now manages more money in its venture funds than in its hedge funds. Another New York hedge fund active in venture investment is Coatue Management which has funded multiple Silicon Valley start-ups . San Francisco-based hedge fund Valiant Capital Management is also an active investor in promising young companies.

Strong Uptrend in Mega VC Deals

The PricewaterhouseCoopers report, which classifies $100 million or higher venture capital rounds as mega deals, shows that there has been strong uptick recently in such mega deals. While there were 16 such deals in 2013, the first three quarters of this year have already witnessed more than 30 deals exceeding $100 million.

The software industry continues to maintain its grip at the top attracting the highest level of funding of all industries while also accounting for the most number of deals in the third quarter. Surprisingly, the media and entertainment industry was the second largest industry for dollars invested during the quarter, primarily due to three of the top 10 largest investments of the quarter falling into companies in its category. A total of $1.8 billion went into media and entertainment companies in the third quarter representing the largest quarterly total for this industry since the third quarter of 2000.

Relevance to Job Market

It is clear that the lofty valuations commanded by some start-ups in Silicon Valley and elsewhere have forced different classes of investors to consider funding young new age companies. According to data provider CB Insights there are close to 30 start-ups commanding a valuation of at least $1 billion. Among them are Snapchat, Airbnb, Uber, Square, Dropbox, JustFab, Qualtrics and Pinterest.

Such a strong enthusiasm for venture investments and free spending by some start-ups flush with cash have caused some industry veterans to wonder whether the market is frothy. But the opinion is divided at this point with prominent venture capitalists such as Bill Gurley and Marc Andreessen sounding caution while others such as Peter Thiel saying that we are not in bubble territory yet. The growing number of start-ups in pretty much every region across the country, coupled with a greater number of new players entering the venture game, has led to strong momentum in the venture capital industry which, in turn, is a positive catalyst for the VC job market.

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