Tech companies continue to land mega VC deals

Big money continues to flow to Silicon Valley tech startups at levels not seen since the dot-com boom, but investors pulled back slightly in the first quarter this year as cooler heads, increasingly wary of returning to a bubble era, kept investments from ballooning to new heights.

Venture capital investments in Silicon Valley tech companies dipped by 6.9 percent, from $6.5 billion in the last quarter of 2014 to $6 billion, and the number of deals VCs made also fell, by 8.5 percent to 323 investments, according to The MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association released Friday. Experts say the slight dip from the previous quarter is a healthy sign that investors aren’t planning to break the dot-com record set in 2000, when quarterly investments topped $9 billion.

“There is a little bit of a pause,” said Tomasz Tunguz, a partner at Redpoint Ventures.

Despite the slight dip, the first quarter was still the third-best for venture capital in more than 14 years in both Silicon Valley and nationally, according to the report, which uses data from Thomson Reuters. Indeed, there is no shortage of cash in venture capital — firms raised a fresh $7 billion in the first quarter to invest in startups, according to the National Venture Capital Association. And a single firm, Menlo Park-based New Enterprise Associates, announced this week it had raised $3.2 billion. And as long as money is for the taking, tech companies are going to ask for it, said Jeffrey Grabow, U.S. venture expert with professional services firm EY.

“The old adage is raise capital when you can, not when you need it,” he said. “You don’t want to be raising money when the sands have shifted. And who knows what the world is going to look like in 18 months?”

Several companies that raised huge rounds last year came back for more in the first quarter. The top three deals in the latest quarter were Uber, which raised $1 billion; Lyft, which raised $530 million; and Pinterest, which raised $367.1 million, according to MoneyTree. Uber last year raised about $3 billion, Lyft $250 million and Pinterest $200 million.

“They are trying to build out their business rather than trying to go to the public market,” said Tom Ciccolella, who leads the U.S. venture capital practice at PricewaterhouseCoopers. “We’re in a space that’s unfamiliar territory. If you go back in time and try to find a $500 million deal, that might be challenging.”

Spurred by Lending Club’s monster initial public offering in December — a $1 billion deal, the largest IPO from California last year — VCs are also pumping money into apps and Web services that aim to reform the banking and loan industry. Silicon Valley financial tech companies raised $391.8 million in the first quarter, 21 times more than in the fourth quarter and seven times more than during the same period a year ago, according to the report.

Four of the 10 largest funding rounds went to financial tech companies or consumer financial service startups, including Affirm, an app started by PayPal co-founder Max Levchin that offers consumer financing for big purchases, and LendingHome, an online marketplace for real estate loans.

Biotech also continued its hot streak, raising $573.9 million from investors, the third-highest quarter for the sector on record. Biotech has often been considered a risky bet: Drug trials must be successful and drugs must get federal approval before a company can make a sale, so investors often wait years before getting a return — if they get a return at all. But in the past year, biotech experts say, successes by public companies such as Gilead Sciences and Pharmacyclics, which got federal approval for breakthrough drugs and sold them at steep prices, heightened investor interest. Also, experts say, the drug-approval process is getting quicker and researchers’ understanding of complex diseases is advancing, making biotech a more appealing investment.

Silicon Valley companies raised nearly half of the $13.4 billion invested nationally in the latest quarter, and about a third of all funding deals took place here. Although the region continues to lead all other tech hubs in funding, Los Angeles and Orange County have emerged as strong competitors. According to MoneyTree, Los Angeles and Orange County companies raised $1.6 billion in the first quarter, triple the amount raised during the same period a year ago and making it the second-most-active region for investments in the country. About $1 billion of that went to SpaceX, Elon Musk’s space-exploration company.

“California is a beast in terms of raising money, and most of that comes out of Silicon Valley, but when you go down to Los Angeles, Orange County and San Diego, you got a big chunk of change,” Ciccolella said.

Much of the money flowing into tech is coming not from traditional venture firms but from hedge funds, pension funds, multinational banks and other institutional investors that are making big bets on late-stage startups such as Airbnb, Dropbox, Nutanix and others. Venture capital tracker CB Insights found that hedge funds and mutual funds accounted for about 36 percent of total investments into VC-backed companies in the first quarter this year.

As long as big wealth managers such as Fidelity and BlackRock are dabbling in tech, experts say, there will be more Uber-size funding rounds.

“In the near term, the mega deals will continue,” Grabow said “But at some point we will see a pullback in (investments into) venture-backed companies, which could be entirely healthy.”

Contact Heather Somerville at 510-208-6413. Follow her at Twitter.com/heathersomervil.