2014 VC Deals and Dollars by Ernst & Young’s Jeff Grabow

The $52 billion of venture capital invested in 2014 was the largest amount since 2000. Are we on a path to repeat the history of the dot-com bubble? While the venture financing environment may appear frothy and some companies may be overvalued — there will always be overvaluations. I don’t think it’s time to sound the fire alarm, yet.

Here are some reasons why:

  • In 2000, the bubble’s peak year, over 6,000 venture capital deals were completed and $95 billion dollars was invested, which reflected a 100 percent increase in VC investment year-over-year between 1989 and 2014’s venture capital investments, while impressive, haven’t hit that level yet. (Figs. 1 and 2.)
  • In her 2014 annual Internet trends report, Kleiner Perkins’ Mary Meeker pointed out that 2013 technology IPO volume was 87 percent below the activity in 2000 (73 percent below in terms of dollar volume). 2014 logged 167 tech IPOs, which is still almost 50 percent below the volume in 2000.
  • The NASDAQ price/earnings multiples on April 1, 2000 – just after the market peak – the average P/E ratio was over 60; in January, 2015 it was just over 23.

More good news: unlike the bubble years when plenty of cash went into funding early stage companies that ultimately failed, VCs today are investing in later stage companies that are either producing product or generating revenue. While it’s being classified as venture capital, many of the later stage mega round financings that we see today (say, $50 million investments and above) are being driven primarily by other asset classes such as private equity and hedge and mutual funds that buy IPOs. So in reality, the amount of actual venture capital in the market is being overstated by these investments.

My conclusion? I don’t think we have entered a bubble yet, but I advise entrepreneurs to take advantage of the robust fund raising environment while they can. You don’t want to be raising money when the music stops, and at some point it will stop. It always does.

Jeff Grabow, Ernst & Young LLP’s U.S. Venture Capital Leader, is based in the Silicon Valley. Read more at http://bit.ly/1u2qinD.

Views expressed are those of the author and do not necessarily reflect the views of Ernst & Young LLP.

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