Thomson Reuters reported that in the second quarter of 2013, U.S. venture capital firms (VCs) raised US$2.9 billion from 44 funds. This is a 54 percent decline from levels during the same quarter in 2012, and marks the lowest quarter for VC fundraising by dollars since third-quarter 2011.
Some industry commentators have attributed the decline to the availability of other sources of funds, including competition from corporations that have their own funds and the increasing number of crowdfunding platforms, but both arguments appear somewhat flawed in that neither corporate cash nor crowdfunding finance sources necessarily affect LP (Limited Partnership) investor funds or appetite. In some sense, quite the opposite can be true as it may increase exit opportunities for invested monies.
What may in fact be contributing to the lack of LP appetite is the rising valuations of startups and early-stage companies. There are also sentiments that while this means on one hand potentially very high multiple exits, on the other hand, it also means expensive deals may proliferate generating diminished returns among VCs as a whole.
The recent valuations implied in Yahoo's acquisition of Tumblr for US$1 billion, and alternative taxi service Uber raising more than US$360 million at a valuation of US$3.5 billion, indicate you have to pay for quality opportunities even when many of these are not yet close to having a clear monetization model.
This trend of optimistic valuations is also seen in Southeast Asia.
Over the past few years, there has been increasing interest in Asia due to the rise of emerging markets and the economic slowdown in Europe and the United States. Many investors have also been looking at startups in the Southeast Asian region for investment opportunities, particularly in Singapore.
In building its reputation as a technology hub, the Singapore government has rolled out several initiatives to enable startups to gain access to funding. These include cash grants, government-backed equity financing schemes, business incubator schemes, debt financing schemes, and tax incentives.
Singapore's startup community has seen a spate of activities with very positive valuations for startups. Deals that have been announced this year include Rakuten's recent acquisition of video content site Viki, for reportedly US$200 million, Nasdaq-listed HomeAway's acquisition of short-term vacation rental site Travelmob, for a rumored US$12 million, and Singapore Press Holdings' purchase of sgCarMart for US$48 million. Singapore looks likely to continue being a hotbed of activity for startups.
The country's largest telecoms provider, SingTel, announced plans to set aside US$1.6 billion (S$2 billion) over the next three years for startup acquisitions. The telco's portfolio currently includes mobile advertising company Amobee, which was acquired in 2012 for US$321 million, and more recently, mobile demand-side platform Gradient X was bought for reportedly tens of millions of dollars. This comes on the back of the completion of a US$40 million financing round of Reebonz, a Singapore-based luxury private flash sales site, led by Singapore's broadcasting and media giant MediaCorp.
However, before startups begin breaking out the champagne and while the landscape looks very positive from an environmental point of view--in terms of government support, big corporations with money, and so on--the VC scene is still underpopulated at all levels other than seed stage.
In addition, given the news about how more established VC markets are struggling to attract LP funds, coupled with increasing Asian valuations, it may be that all but the cream of the crop are pricing themselves out of investment.