The money poured into the region represents more than half of the $13 billion in venture capital investment nationwide in the second quarter, according to Pricewaterhouse-Coopers LLP and the National Venture Capital Association’s MoneyTree report. San Francisco startups played a large role, drawing the bulk of the local haul through huge funding rounds for app-based ride services such as Uber and Lyft.
“If you compare now to 10 years ago, San Francisco is more important now than it was in the past,” said Jeff Crowe, a managing partner at Norwest Venture Partners, a Palo Alto venture capital firm. “San Francisco has become the epicenter for the formation of new consumer Internet technology companies.”
Crowe said in the past, that epicenter was in Silicon Valley, but it has since moved to San Francisco, as startup founders are getting younger and choosing to open businesses where they live.
The return of sky-high venture investments recalls the days before the dot-com crash, but analysts say a key difference is that major funding is going to companies that already have established track records.
“Before alarmists declare a repeat of the dot-com bubble, it’s important to keep in mind that a lot of this activity was driven by a handful of eye-popping investment rounds,” Bobby Franklin, president and CEO of the National Venture Capital Association, said.
One of those rounds was a $1.2 billion investment in Uber, which was the largest deal in the MoneyTree report’s history. The report, based on data from Thomson Reuters, has tracked venture capital investments since 1995.
The second largest deal in the quarter was given to Uber’s competitor Lyft, which raised $250 million. A huge funding round for San Francisco’s Airbnb, the marketplace that lets people offer short-term rentals of their homes, was not included in the report because the total amount of money changing hands hasn’t been confirmed yet.
Mark McCaffrey, PricewaterhouseCoopers’ global software industry leader, said rounds of more than $100 million became a phenomenon in the last 12 months. As a result, he thinks the companies that benefited from huge funding rounds will use the cash to scale up their businesses, alleviating pressure to go public before they are ready.
“A lot of these companies aren’t just raising rounds, they are basically creating their capital structure,” McCaffrey said.
McCaffrey said as a result, established tech companies are looking to invest in startups at an earlier stage rather than buying firms with large valuations. He said nationally, venture capital investing this year is on pace to exceed last year’s total of roughly $30 billion.
Venture capitalists invested $6.1 billion into software companies nationwide in the second quarter, about a 50 percent increase from the prior quarter, the MoneyTree report said.
The other two top fields that saw increases in funding nationwide were biotech, and media and entertainment. Venture capital investments in biotech increased 69 percent to $1.8 billion, and in media and entertainment by 40 percent to $1 billion in the second quarter, compared with the prior quarter.
Venture capitalists decreased their investments in areas such as business products and services, telecommunications and semiconductors.
Jason Shah, an entrepreneur-in-residence at Sherpa Foundry, an organization that helps startups land funding, was encouraged by the amount of venture capital raised in Silicon Valley. He is in the process of opening a startup and says his team and investors are in San Francisco, so he plans to base his business in the city.
“It stems from the talent pool,” Shah said.