Dow Jones VentureSource released its second quarter numbers for the venture industry today, and there’s a reason they’re not dominating the headlines. They’re pretty boring: Overall investors put $8 billion into 776 deals in the US in the second quarter, a decrease of 5% in terms of invested cash and 2% in terms of deals. The median amount raised per deal was $5.2 million, up from $4.6 million a full year earlier. Yawn, right?
But the fact that the numbers are so unremarkable is what makes them interesting. It reinforces what people like me have been arguing for months: A handful of hot companies does not a bubble make.
The venture business has always been an outrageously lopsided one: 95% of the returns come from 5% of the deals. But while that was still true in the late 1990s, the overall numbers soared astronomically. That’s what happens in a bubble: A rising tide lifts all boats.
That’s clearly not happening here. In the public markets: LinkedIn has come down in price from its highs, but held on to a healthy price around $100 a share, as you’d expect from a 10-year-old, still growing company with few market comps that didn’t float many shares to begin with. Pandora is trading around $18 a share, closer to its 52-week low than its 52-week high. A smaller issue like Zillow has cooled off dramatically since its huge opening pop, but about 30% higher than its initial pricing. And again, Zillow is a pretty mature business. There’s some crazy volatility in the early days of these stocks, no question. But there doesn’t appear to be a broader market impact from any of them, and they each have quickly settled into a more rational price-territory. Not what you see in a bubble.
Let’s look at the secondary markets: Most of the attention still goes to the big five or six social media names. The real opportunity for this market to take off is creating liquidity for the companies “below the fold”– so to speak. Companies that have built solid $100 million in revenue or so businesses that are too small to go public and have employees who need some liquidity. There’s just no raging speculation there; no middle-America grandma buying shares in these names. Indeed, many of these companies are just now trying to wrap their heads around how they could best use the secondary markets to their advantage. This is why the secondary markets remain a pretty small phenomenon in the world of finance.
And now, we’ve got new numbers from the venture world that back up the same sentiment. When you dig a little deeper, the point is made further. Dealmaking in the healthcare space is down 12% and the capital invested is down 17%. Investments in biopharmaceuticals where decimated with a 25% deal drop; investments in medical devices were flat. Software-related companies were a relative brightspot in healthcare but deals were only up by 5%.
Likewise, the cash going into clean tech took a nose-dive in the second quarter. The sector raised $556 million for 29 deals, less than half the cash that 30 clean tech companies raised in the second quarter of 2010. This in the year John Doerr predicted cleantech would finally start to produce those Netscape-moment-like IPOs. Doerr is one of the smartest investors in the industry. You’d think in a raging bubble, his prediction would have been easy to prove true. Instead, the category looks colder than ever. Many VCs seem to be wondering whether the cynics were right back in the early-to-mid-2000s when they said that cleantech is too capital intensive and long-term to payoff in a modern venture capital ecosystem dominated by the instant gratification of the consumer Web.
Even enterprise software– a sector with some bonafide hot names and recent liquidity– had a slight dip in overall activity. One hundred and twenty-five companies raised $1 billion, which represented a 15% increase in capital over last year, but there was a 3% drop in deal making overall.
Now, did consumer services do well? Of course. But that’s easily skewed by just a handful of mega-financings. Indeed, the numbers showed the increase was mostly in cash, not overall deals. Capital raised by consumer companies jumped 51% over the second quarter of 2010, but deal making was up just 7%.
When you dig in deeper, the sub-category that includes social media, entertainment and consumer Web only saw a pop of 25% in cash raised over a year ago, and saw a slight drop in deal making activity. In aggregate, consumer Web companies raised less than $1 billion in the quarter. Clearly a few big mega-financings are driving those numbers, and there’s not even enough of them to lift the top line numbers.
I’ve said it before, I’ll say it now and I’ll likely keep saying it: A handful of surging companies with heady valuations do not constitute a macro-economic phenomenon. That constitues, at worst, a handful of really overvalued companies. The only thing to suggest Silicon Valley is in a bubble are the headlines, because the numbers just still aren’t there.