All week we’ve been seeing lots of dazzling headlines about the state of VC going into 2015. According to CB Insights, venture capital firms invested more than $47.3 billion in more than 3,600 deals with U.S. startups in 2014, up 63% from 2013; and the highest level of VC funding since 2001. In their report, seed financings hit a 5-year high, increasing steadily over the course of 2014.
Then today, we can across a Mattermark post that claimed the total number of seed rounds was actually down 30% in 2014. First of all, they exclude biotech, pharma, cleantech, and energy -- while CB Insights named healthcare one of the hottest sectors for VC funding, so that’s one explanation for the different tunes. While they agree the amount of money was the largest amount of capital the market had seen in 10 years, deal volume had dropped significantly.
This is an important factor in the “are we or aren’t we in a bubble” conversation. On paper, it can look like we’re sliding into a bubble of similar size to the dot-com boom. It is clear that valuations and caps are increasing; on average, seed round sizes grew 28% while the median rose 40%. One could argue that more deserving startups are receiving greater capital in order to succeed, and there could be less failures overall.
Also at play are interest rates. Mattermark references a post last year by Fred Wilson, who explains that artificially low interest rates in the U.S. since 2008 require astronomical valuations in order to make any return on investment. Essentially, the money isn’t worth as much as it sounds like.
We suggest checking out the Mattermark analysis, which explores the connections between economic indicators and fundraising trends, looking forward to 2015 for other clues to watch.