New data show that local
venture-capital deals have come roaring back after the economic downturn.
Investors pumped $1.54 billion into Washington area companies last year, the largest sum in more than a decade. The figures suggest that venture capitalists may be more bullish on the state of the economy and are loosening their purse strings as a result.
The 2013 figure is surpassed in recent years only by the $2.1 billion that local companies attracted from investors in 2001, a hangover from the venture-capital frenzy that helped fuel the dot-com bubble at the turn of the century.
The economic downturn pushed local venture-capital numbers to their lowest level in a decade, and the subsequent economic uncertainty and Washington infighting kept confidence tepid.
For example, just $756.8 million was invested in the region during 2012.
“One of the things we said contributed to that was the general uncertainty [about] the economy and what was going to happen in Washington. There were a lot of question marks there,” said Brad Phillips, director of emerging company services at PricewaterhouseCoopers.
There are fewer of those question marks today.
Most important, Phillips said, is that the number of venture-backed companies to go public climbed to 82 last year, the highest number since 2007, a welcome change for venture capitalists who see initial public offerings as a way to recoup their investments.
At the same time, however, the uptick in initial public offerings coincided with a decline in the number of venture-backed companies engaging in mergers or acquisitions.
“We expect this forward momentum to continue. To be clear, it’s mainly because the exit markets are very active. We think that’s going to continue to drive VC investing,” Phillips said.
The Washington region also benefited from investors’ affinity for the software and biotechnology industries, which ranked as the most-funded sectors nationwide last year. Locally, software firms attracted $528.6 million and biotechnology firms attracted $353.4 million.
The figures were revealed Friday in a quarterly report from the National Venture Capital Association and PricewaterhouseCoopers. Thomson Reuters provided the data.
District-based Revolution was among the year’s more active investors. The firm sank $40 million into T-shirt maker CustomInk and $20.5 million into salad chain Sweetgreen during the fourth quarter alone.
Revolution chief executive and former AOL chairman Steve Case said the investment firm spends little time thinking about whether a company will eventually pursue an initial public offering, focusing instead on the idea behind the business and the founders’ ability to make it a reality.
“We don’t try to predict the timing of or the ultimate exit,” Case said. “If we help build great companies, they will be more valuable in the future than they are today, and somehow, some way, we’ll figure out how to monetize that investment.”
Case described venture capital as a cyclical business and said the Washington region “was sort of in the middle” last year between investors being overly cautious and blindly optimistic.
“D.C. will continue to be a little more balanced in terms of people paying higher valuations for companies that really are strong companies, but not chasing things in a way that leads to frothy or unsustainable valuations,” Case said.
Indeed, in the years following 2001, venture-capital investments declined regionally as the tech bubble burst and many investors found themselves holding equity in companies that weren’t worth nearly as much as they paid for them.
But investors and analysts don’t expect the market to head toward such a cliff in the year ahead.
Julia Spicer, executive director of the Mid-Atlantic Venture Association, said investors have grown more savvy as a result of the recession.
“We have a good memory and I think that’s what’s helpful for disciplined investors,” Spicer said. “They don’t lose sight of cycles and they don’t lose sight of big events, and they learn from them.”
To see a comprehensive list of recent Washington area venture deals, visit capbiz.biz.