Editor’s note: Larry Alton is an independent business consultant specializing in social media trends, business, and entrepreneurship.
Only once before has a market been so excited to fund agile, adventurous new startups. According to CB Insights, private and corporate investors put $47.3 billion into startups in 2014. The only time investment capital came close to such a peak was during the dot-com bubble in 2001 when investors poured $36.2 billion into emerging startups.
The total amount of capital that was generated surged 62 percent over the 2013 figure, but the study notes that this is mostly due to several rounds of funding worth $500 million or more. To illustrate this impact, the total number of deals only rose 8 percent over 2013 to a total of 3,617 deals.
Nevertheless, more than 3,600 companies received a portion of that $47 billion in 2014, with mobile-specific funding hitting a new record $7.8 billion of funding.
There are two possible takeaways from these findings, and you’ll likely side with one, depending on whether you’re an optimist or a pessimist.
First, this surge of funding could continue indefinitely. The demand for new apps, new technologies and new paradigm-shifting developments will undoubtedly continue, and venture capitalists will be more excited than ever to fork over millions in cash to promising young companies. If this is the case, it’s likely to encourage more new entrepreneurs, more new ideas, and a self-perpetuating cycle of innovation, disruption, success and distribution (for the lucky ones).
Second, this influx of new private capital could be the sign of a new bubble — and one that’s about to burst.
Fred Wilson, the founder of Union Square Ventures, recently expressed his fears that startup ventures are burning through cash, rather than forming profitable, long-term models through technology.
He says, “…burn rates are exactly that. Burning cash. Losing money. Emphasis on the losing. And they are indeed sky high all over the US startup sector right now,” going on to say, “At some point you have to build a real business, generate real profits, sustain the company without the largess of investor’s capital, and start producing value the old fashioned way.”
His comments fall in line with one of his contemporaries, noted startup tech investor Bill Gurley, who notes, “…I guarantee you two things: One, the average burn rate at the average venture-backed company in Silicon Valley is at an all-time high since ’99 and maybe in many industries higher than in ’99. And two, more humans in Silicon Valley are working for money-losing companies than have been in 15 years, and that’s a form of discounted risk.”
This year will shape up to be an interesting one for startup investors. The increased availability of venture capital will no doubt motivate hundreds of new entrepreneurs to enter the scene in an effort to claim a piece of that pie. This, in turn, could increase the competition or simply provide new opportunities to venture capitalists who are itching for new startup ventures to back.
This renaissance of startup tech companies is appealing and exciting for anyone involved in the industry, but the bubble-related concerns of experienced venture capitalists are very real. Time will tell whether this influx of investments will encourage even more rampant growth in the tech sector, or mark the beginning of the end of an era.
