Venture Funds Raised Most in 2018 Since Dot-Com Boom

(Bloomberg) -- Virginia’s Hampton University endowment was never a big investor in venture capital. But last year, after Unusual Ventures’ John Vrionis got in touch with the institution, the school signed on to back his $150 million fund.

Hampton part of a wave of investors squeezing into the burgeoning venture capital industry. VC funds in the U.S. raised $55.5 billion from investors last year, according to a new report from the National Venture Capital Association and PitchBook—that’s the most since the dot-com era, and far more than last year’s $34 billion.

The rush into venture takes place against a backdrop of uncertainty in the public markets, as many economists forecast a slowdown or even a recession on the horizon. The volatility has spurred many startups to seek to raise money now, hoping to build themselves a buffer in case market conditions worsen. It’s also prompted investors to view private companies as a way to park cash and seek higher yields as stocks seesaw. Though the sector does come with drawbacks: venture bets take place over a much larger time horizon—often in the ballpark of 10 years for a typical fund.

Part of the urgency to invest in private companies now is that more startups are waiting longer to go through an initial public offering, meaning public investors are missing out on years of growth. As companies like Uber Technologies Inc. and Slack Technologies Inc. rush to go public this year, before public markets worsen, the venture investors who got in early enough will likely reap big gains. Those potential windfalls have driven increased interest from international investors as well as U.S. universities, nonprofits, and wealthy families, some of them first-time backers of venture funds.

“They’ll literally give you as much as you’ll take, because they’re dying to be in the asset class,” said Vrionis, known for his prior investments in companies like AppDynamics.

Hampton was initially a tougher sell. The school didn’t have deep venture experience, but Hampton President William Harvey said the eventual decision was driven by the impetus to increase the $286 million endowment’s exposure to different sectors. Vrionis said he made an effort to bring in new and diverse investors, including historically black colleges like Hampton, Howard University and Spelman College, which generally have smaller endowments compared with other major universities. Overall, educational institutions that invest in venture have been upping their allocations, according to the National Association of College and University Business Officers, to 6 percent of endowment assets compared to 4 percent five years ago.

Famously, most of venture capitalists’ bets fail, but data suggest overall gains in the industry have been substantial in recent years. Venture has delivered annual returns of about 9 percent when measured through Dec. 31, 2017, according to consultancy Cambridge Associates, compared to about 8.5 percent for the S&P 500 stock index over the same time. The returns could look better once venture data for last year becomes available—especially compared to a 6 percent decline in the S&P in 2018.

“Venture has regained a little bit of its luster,” said Michael Hoffmann, founding partner of Probitas Partners, which advises alternative investment managers on raising capital. “A few years ago, [investors] were closing out their portfolios because performance was so dismal.” Now, he sees renewed interest from wealthy individuals, insurance companies and sovereign wealth funds.

Venture firms, too, are racing to raise money—partly spurred by competition from the SoftBank Group Corp.’s multi-billion-dollar Vision Fund. (The Vision Fund was not included in the NVCA and PitchBook data because it is a corporate investment arm, rather than a standalone venture capital firm.) More than half of the cash raised last year went to megafunds, which brought in $500 million or more, such as Lightspeed Venture Partners, which a pair of funds totaling $1.8 billion. First-time managers such as Unusual Ventures collected $5 billion, the most in at least a decade, the NVCA said.

But some industry watchers advise caution as investors make forays into a new asset class. “In VC, a handful of firms outperform delivering outsize returns, with most VC funds being a great place for good money to die,” said Anand Sanwal, chief executive officer of of CB Insights, a firm that analyzes market data. “Of course, the underlying trend buoying VC is the widespread influence of technology on every industry, which doesn’t look to be slowing anytime soon.”

--With assistance from Janet Lorin.

To contact the editor responsible for this story: Anne VanderMey at avandermey@bloomberg.net

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