No matter your stance on the great Bubble debate, 2014 was a relatively remarkable year for those involved in the venture capital industry. Overall there was an increase in investing, valuations and fundraising. There was also a huge trend for industries to consolidate. Last year, about 4% of the firms who raised any funds accounted for just less than half of all capital raised. This led many to think that the VC industry was beginning to decline and shrink. However, after much research, most VCs continue to be excited about how their opportunities are lining up especially when it comes to tapping into the upcoming transformative tech companies.
The VC Market and Startups
Today’s entrepreneur is able to get started with less capital since they are able to develop technology, test a few business models and then evaluate what kind of market demand exists. This easy, less expensive process allows for a substantial increase in the number of new companies seeking for financial backing. Efraim Landa, an entrepreneur and venture capitalist in NJ knows how to take advantage of the latest trends in the VC market. Cloud computing and mobile devices have a significant impact on new industries and gains momentum from some of the huge, global end user markets that exists for technology products and services.
Company valuations currently reflect the wide range of opportunities on a global basis with more than 3 billion Internet users. Another plus for technology based startups is the fact that it is estimated that there will be four billion Smartphone users as soon as 2020. Technology innovations along with more capital being made available allows for companies to stay private longer. The advantage for venture capitalists like Efraim Landa to invest more in the creation of valuation for the company. As a result, companies are growing larger and becoming more stable as a private entity. This allows them to merit a high valuation or gives them the opportunity to grow into a higher valuation.
Last year, there were 38 venture backed companies able to join the Unicorn herd. By year’s end this brought the total to 78. This year the Unicorn count has been estimated to be well past 100 and the industry has started tracking what is called a “decacorn” or a private company which is valued at or above $10 billion. At the end of 2013, Facebook was the only company labeled a deca-corn. This year there are already at least 10 including: Xiaomi, DropBox, Uber, Pinterest, AirBnB, Lufax, Snapchat, Flipkart, SpaceX and Palantir.
2015 – Year of the Healthy Exit
Last year the exit markets were still open which had been a trend starting back in 2010. In 2014 there was an increase in both IPOs and merger and acquisition activity. Early this year there was a lull in M&A and IPO activities, but the market is being set up for the industry to generate future exits as many of the Unicorn companies continue to mature.
Structural Changes in the Venture Capital Market
There’s no doubt that the VC industry is changing structurally. This is important to entrepreneurs who are trying to raise capital, but it will also have an impact on the entire financial industry. Fewer IPOs mean companies stay private longer and public investors are joining the VC industry. In one way we are watching the entire industry transform. Some of the most noticeable changes include increased small funds, capital being concentrated on fewer but larger firms, a decline in the total number of venture capital firms and companies staying private longer.
One of the most powerful influencers in the present VC market is that it is cheaper to build a company than it has been before. It costs much less for storage, computing, bandwidth, and networking. This has changed drastically over the last 15 years. Cloud based technology is one of the factors that helps bring down the initial cost of a startup. It used to cost $5 million just to get started and most of this money went straight from the VC’s bank to the startup’s bank where it was shuffled directly to some of the top technology companies like BEA, Exodus and Oracle. It was just considered up-front capital. It was just an expected expense.
Today, a startup is able to scale their cost of operating and they are more able to pay as they go. Software development is a much smoother process and takes far less developers. Customer acquisition is a much easier task with the recent proliferation of online platforms like Facebook, Twitter and Google. This means a startup needs smaller amounts of capital invested. This all explains the rise of small funds. However, even though it is less expensive to get started and get into the market, it takes more money for a breakout company to actually win the market.
VC Market is Alive and Well
For LPs and VCs venture capital is still alive and the future looks very bright. Private investors have a great potential when it comes to returns. Entrepreneurs are in the perfect position to obtain capital from a variety of sources and more able to build companies with a long time plan.