Venture capital firms, already reveling in the most vibrant initial public offering market in more than half a decade, are being further propelled by a spate of billion-dollar acquisitions.
Facebook Inc.’s agreement to buy Oculus VR Inc. this week for as much as $2.3 billion marked the fourth 10-digit deal this year of a venture-backed company. Just nine months ago, two- year-old Oculus raised money from Matrix Partners and Spark Capital at a $70 million valuation.
The quick sale comes a month after Facebook agreed to spend $19 billion on WhatsApp Inc. and seven weeks after Google Inc. completed its $3.2 billion purchase of Nest Labs Inc. Neither of those companies had raised venture financing before 2010. Such fast returns on capital keep venture firms from having to pump numerous rounds of financing into companies while waiting years for a potential IPO.
“We’re early-stage investors and it takes five to seven years for companies to mature,” Santo Politi, a venture capitalist at Boston-based Spark, said in an interview yesterday on Bloomberg West. “We didn’t expect it to be this quick. It happens with amazing teams.”
The recent success of venture capital is bringing increased competition from hedge funds, private-equity firms and mutual funds, which are looking for ways to profit from the technology shifts under way in mobile, cloud computing and connected devices. In addition to the rush of IPOs and acquisitions, startups are raising $100 million private rounds at a record pace from asset managers like BlackRock Inc., T. Rowe Price Group Inc. and Tiger Global Management LLC.
Industry Rebound
For the venture industry, the acquisitions are fueling a rebound after returns lagged public markets for a decade, according to data published last year from Cambridge Associates LLC. Scores of startups failed in the dot-com crash from 2000 to 2003, and the IPO market screeched to a halt during the financial crisis starting in 2008.
Last year, at least 10 venture firms generated returns of $1 billion or more from acquisitions and IPOs, of which Twitter Inc. was the biggest. Pension funds and endowments, which serve as limited partners in venture firms, are coming back, said Byron Deeter of Bessemer Venture Partners in Menlo Park, California.
“A lot of portfolio managers fundamentally questioned the asset class,” Deeter said. “That has swung back to where industry averages are becoming nicely attractive again.”
Faster Pace