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Venture capital spending hits all-time high in 2018, eclipsing dot-com bubble record

Venture capital firms spread roughly $131 billion across 8,949 deals throughout the year.
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In 2018, venture capitalists wrote checks like never before.

The amount of money firms spent on private companies hit a new all-time record last year — well above the previous watermark from the dot-com boom.

Venture capital firms spread roughly $131 billion across 8,949 deals throughout the year, according to data published by Pitchbook and the National Venture Capital Association Thursday. The previous record was a $100 million total notched in the year 2000.

Although the dollar amount jumped by more than 57 percent from $83 billion last year, the number of deals went down. Deal count fell by about 5 percent this year from a roughly 9,400 total last year.

Cameron Stanfill, Pitchbook venture analyst who co-authored the report, said sky-high price tags for start-ups accounted for the new record total despite having fewer deals.

“There is a lot of money competing for a finite amount of companies, and that’s pushing prices up,” Stanfill told CNBC in a phone interview.

More than 61 percent of total capital invested came from deals sized at $50 million or larger. This boosted the average deal size and valuations across every investment stage and series last year, according to the report. But because venture investors are paying so much up front, it’s becoming harder to profit.

“If an investor has to put in more money a into an initial equity investment at a higher valuation, they’ll have to grow that business way more to get the same returns they were used to getting 10 years ago,” Stanfill said.

Going public

Last year, the biggest number of VC-backed companies entered the public markets since 2014, according to the report. Venture capital exits hit $120 billion — a 33 percent increase from 2017, largely thanks to IPOs and buyouts.

Market conditions could throw a wrench in that this year. Stocks are sputtering out of the longest bull market since World War II and investors are worried about a dampening global economic picture, trade uncertainty and a U.S. government shutdown.

“If we see investors switch sentiment from ‘greed’ to ‘fear,’ many growth stories priced for future perfection may continue to rely on private capital to avoid pricing in that environment,” Silicon Valley Bank CEO Greg Becker said in the report.

The government shutdown may also slow things down for companies looking to IPO in 2019. In order to list on a public exchange, companies need to file paperwork with the Securities and Exchange Commission — one of the agencies shut down until a government spending bill is signed. Pitchbook’s Stanhill said that some companies that had been aiming to list in January are being forced to push back those plans.

Plenty of unicorns, or companies valued at more than $1 billion, have indicated that they plan to go public this year. Venture-funded Airbnb, Uber, Lyft, Pinterest, Slack and Palantir are all on the watch list.

Regulation is also expected this to be a growing topic and possible concern for the venture industry, according to Pitchbook.

The report highlighted new foreign investment legislation — the Foreign Investment Risk Review Modernization Act, or FIRRMA — which expanded the scope of the Committee on Foreign Investment into the United States to include minority investments in U.S. companies. That regulation is already causing “friction” around the fund formation and companies’ financing process, the report said.