Earlier this week Lithium Technologies announced completion of its D round of financing valued at $53.4 million. You can read the press release to get the details but the big question I have is what’s going on in the industry?
Lithium is not the only company in the last six months to pull in sizable sums from the investment community. Without doing much research I can name several others that have raised tens of millions of dollars in later rounds including Zuora, Marketo and Aria and there are others out there.
Not long ago it was common knowledge that SaaS or cloud companies needed less cash to get moving. Gone were the days when a company like Salesforce.com had to spend upwards of $100 million to get people thinking about the cloud as a suitable alternative to business as usual. But the latest news seems to be taking us back because today’s companies seem to be raising as much money as ever.
It’s true you don’t need to spend lots of moolah to define the cloud market these days but something else is demanding cash. Companies are staying independent longer and the idea of going public is again on the minds of investors. Over the last few years of recession and retrenchment, the IPO market was practically frozen and the only way to have a liquidity event was to sell your company to a bigger and more established company.
But also, earlier IPOs happened in relatively frothy environments in which categories and markets were still rather fluid and the companies that went public back then were less mature. Today companies like Lithium, Marketo and Zuora are raising tens of millions of dollars to support activities like opening foreign markets with offices and staff and to flesh out product lines. They may even be in the hunt for less mature companies that they can purchase—and all this before taking a nickel from the general public.
All this suggests that the IPOs, when they happen will be at much higher valuations and the shareholders will have reasonable expectations of profits from the newly minted public companies.
All of this may be a sign that investors, i.e. venture capitalists, are still somewhat gun shy of putting money into green startups preferring to invest in late stage companies with compelling stories and IPO event horizons that can be measured in months rather than years. Many have investments on the books that go back to the Bush administration’s first term and their investors are understandably interested in liquidity also.
So Lithium’s news is as interesting for what it says about that company and its social CRM marketplace as it is for what it tells us about the investment market and where we are in it.
Attention please: venture capitalists are giving out money again — lots of it.
In the last few days the news news reported at Deals&More shows a very healthy venture capital industry making moves in the software market. Late stage companies like Box.net ($81 million) and Dropbox ($257.2 million thank you veddy much) led the way.
Following the go big or go home mantra, established companies taking home big purses said they are in the market to expand and perhaps make some acquisitions in advance of future IPOs. According to reports, Dropbox, the largest recent deal had multiple participants including leader Index Ventures, and other investors Goldman Sachs, Benchmark Capital, Greylock Partners, Institutional Venture Partners, RIT Capital Partners and Valiant Capital Partners. Two prior investors, Sequoia Capital and Accel Partners, also participated.
What’s interesting and good is not the size of these deals but the others that have been reported such as Clickable $12 million; Tidemark $11 million; Waze $30 million; and BillGuard $10 million.
These smaller deals show that capital is again flowing into earlier stage companies that offer more risks as well as rewards. They also show an increasing appetite for risk among investors due in part to several successful IPOs earlier this year. According to VentureBeat software and consumer web companies raised $2.66 billion from 281 deals in the first half of 2011.
All this cash invested is part of the reason there are so many job openings in the northern California technology market and why these jobs are so hard to fill. They also speak to the prospect of a continuing IPO boom in the years ahead.
Can a bubble be far behind?
Not bad for a recession, that’s what I say. The news from Cloud9 Analytics and Mayfield Fund says a lot about a lot. First, the nearly moribund venture capital industry is showing signs of life after a couple of long, quiet years.
Last year, 2009, was the worst venture capital year since 1997 measured by the amount of cash invested (about $17.8 billion) and cash raised (about $15.2 billion). That’s right in 2009 the industry invested more than it raised and that hasn’t happened in a long, long time. For a benchmark, in 2000 the industry invested just over $100 billion and then you know what happened. A more typical annual tally in the last decade was between $20 billion and $30 billion. So the fact that Cloud9 was able to raise $8 million is very interesting news.
Of course, a C-round is an important marker because it means the company is maturing and becoming ready for a liquidity event. The short event horizon is a sign that the VC’s a stepping carefully into the water again. When we see a stampede to A round companies it will be a different story.
So, what about Cloud9 makes it appealing? I think a couple of things. First, they offer SaaS based analytics but that’s not enough these days. SAS got into that market a month ago and they’re the gold standard and there are many others doing something with analytics as a SaaS service. But the thing I like about Cloud9 is that they’re articulating, or starting to, a vision of more strategic use of analytics for the small business through the small enterprise.
SAS can be excused from this conversation, but there are a lot of analytics vendors out there that haven’t gotten beyond the idea of selling people on the tactical use of analytics.
So this announcement has legs and it shows hope that the venture capital industry in resurgent and that analytics is gaining more traction where it’s needed.
Incidentally, the hot markets for venture funding, in order are Biotech, Software, Industrial/Energy, and Medical Devices according to PriceWaterhouseCoopers and the National Venture Capital Association who compiled the data referenced here.
In our industry we live on innovation and innovation takes capital — something that has been in short supply over the last couple of years. Venture funding took a massive hit in 2009 but there are signs that the trend might be bottoming out. If it is, we might all learn to exhale again.
According to an article at BloggingStocks.com, a recent report “…from PricewaterhouseCoopers and the National Venture Capital Association (using data from Thomson Reuters) pegs total investment in start-ups for the fourth quarter of 2009 at $5.02 billion, a decline of 2% from the third quarter. Year-over-year, it represents a plunge of 14%.
Most revealing was this: “For the entirety of 2009, VC investments fell 37% to $17.7 million, its lowest level since 1997. Essentially, VC activity receded to pre-dot-com boom levels. At the peak of the dot-com economy, VC funding was more than five times greater, reaching $100 million in 2000.”
Yikes! 1997! How many of us were doing what we do now then? Those thirteen years are an eternity in this business.
But, as they say in the infomercials, there’s more. According to an article in siliconvalley.com, “The $17.7 billion in new investments in startups contrasts with $15.2 billion in new commitments to venture funds during 2009. The amount of commitment was nearly $21 billion below the $36.1 billion raised in 2007, before the start of the financial crisis, and $13.3 billion less than the $28.6 billion raised in 2008, when pension funds and university endowments curtailed their venture investments.
Did I read that right? The VCs took in less than they invested?!
It would take a lot for me to lament the plight of venture capitalists and we are not there yet, but this data does give me some major concern for those people trying to start companies to invent the future. Clearly we are in a VC slump and it is just as clear to me, that there is a certain seasonality to this kind of investing.
Big investment is driven by major changes or transformations in the economy. You and I might not see or understand these transformations but it is the job of venture capitalists and others to look for telltale signs and act accordingly. For instance, when the CPU chip was invented or on-demand computing came about, the inventions spawned multiple category invention to take advantage of the original innovations.
The CPU chip cratered the cost of computing making all manner of devices possible that were once limited by cost. The chip also made it possible for subsequent generations of dreamers to think up more ways to use computing power. The net result was a virtuous circle of innovation, investment and new products.
Today’s relative plunge in investment is more than an indication of tight credit or a recession. I think there’s more going on. By definition the money you give to the VCs is money you have a reasonable expectation of losing. If one in ten VC investments pans out to the point of a liquidity event — such as an IPO or acquisition — French champagne flows. But more typically everyone is drinking diet drinks with pizza in an all-nighter to get a product to work.
So my point is that if money is not flowing into VC funds, it is not the result of a credit crisis because venture investment is discretionary. It is more likely a crisis of confidence and a crisis of new ideas and that won’t be repaired by pouring money on Silicon Valley.
To be sure, there are ideas out there and a sure sign of a recovery happens when investors start coming back. For me, I like to watch what’s happening to later stage companies, the ones that need a B or C round of funding. At least in SaaS computing that seems to be where money is going. I don’t have more than anecdotal evidence — i.e. what people tell me, not official statistics — to back this up.
Nonetheless, it would make sense. B and C round companies are much more mature and closer to the liquidity event horizon, hence the possibility of a payout is closer. But there are only so many companies and there is still a good deal of cash to be invested so, sooner or later, investors will again have to look at A round opportunities.
While many fields might get a share of the VC pie — green tech, bio tech and others — I think there are still great opportunities in CRM. I believe we are at a point when much of what we do will need to be rethought. A new level of sophistication in our business processes supported by a consolidation in software functions beckons. I just wish it would hurry up.