After a brutal 2009, this year looks to be more promising for venture capitalists. About $12.2 billion was invested in startups during the first three months of the year, down from $22 billion from the same period a year ago, according to PricewaterhouseCoopers/National Venture Capital Association.
But by the latter part of the year, a lot more deals were done. Zynga raised $180 million, Chegg raised $57 million, Playdom raised $43 million, Quidsi (parent of Diapers.com) raised $30 million, and exits were looking up as M&A accelerated. For instance, Google bought AdMob for $750 million, Adobe bought Omniture for $1.8 billion and Cisco bought ScanSafe for $183 million.
The last two acquisitions were of Scale Venture portfolio companies, Omniture and Scansafe. Those are nice liquidity events to help Scale's investors feel confident in putting more money to work at Scale for perhaps a new fund. Not surprisingly, Sharon Wienbar, venture capitalist at Scale Ventures, is very optimistic about 2010.
In fact, she's getting frequent calls from investment bankers - a good sign that the public market investors are starving for fast-growing companies.
"Bankers are saying there could be more than 100 tech IPOs in 2010," said Sharon, in this segment of our three-part interview series.
Here are some highlights:
- The current level of VC fundraising and investments - while down - is actually healthy for the industry. VC investing as a percent of GDP is about half a percent of GDP, which is a long-term typical average. During the bubble years, it was about 2%. So, the industry is rightsizing itself. What this means is more opportunity for companies to grow their businesses rather than spend money trying to beat out competitors.
- Companies grew really nicely in 2009, making VCs feel bullish again. For example, Hubspot (which raised $16 million in October, led by Scale) has seen revenue more than triple in 2009. Secular trends are outpacing the cyclical decline in the economy.
- It's unclear whether public market investors will embrace IPOs that are not profitable. For instance, ReachLocal, which just filed for an IPO, has generated $143 million in the first nine months of this year, but is not profitable.
- Public market investors appear to want high-growth companies. But reception of ReachLocal will be a good indicator. Right now, only 25 companies in the Nasdaq are growing at 20% annually. Their multiples are pretty low (12x EBITDA). This is not typically considered a growth company. To this end, demand for higher-growth companies (50% revenue growth) may increase in 2010. This will bode well for the later-stage companies growing revenue quickly, but with little or no earnings.