WASHINGTON • Venture capital companies in the United States are raising money at the highest rate in more than 15 years, even as the values of some once-hot start- ups have begun to cool.
In the first quarter this year, US venture funds collected about US$13 billion (S$17.5 billion), according to The Wall Street Journal (WSJ), using data from Dow Jones VentureSource. It added that this is the largest total since the dot-com boom in 2000.
At the same time, hedge funds which helped push valuations of technology start-ups to dot-com- era heights are getting picky, Bloomberg has reported.
Last month, hedge funds participated in the fewest number of venture capital rounds in US tech companies since 2013, inking just two deals, according to research firm PitchBook Data.
The funds have become circumspect as some start-ups have failed to live up to their billing, while some have had disappointing IPOs, and many others are choosing to stay private longer.
"We've completely stopped investing in private tech," said Mr Jeremy Abelson, a portfolio manager at Irving Investors, a small hedge fund based in New York. "I'm done with intangible valuations, unknown exits, unknown liquidity, and I want something that if I put my money into it now... I'm going to get something that's immediately yielding."
In 2013, tech investors could expect an average return of 160 per cent from the last private fund-raising round to IPO, Bloomberg said, citing data compiled by Irving Investors from BVMarket Data.
In the second half of last year, the average return fell to 29 per cent as investors turned cautious, forcing start-ups to cut costs, fire workers and accept more stringent terms when raising money.
Big hedge funds have not abandoned the US tech market, they are just getting choosier, Bloomberg said. For example, Dragoneer Investment Group backed four tech start-ups in 2014 (including Instacart and Airbnb) and just one last year (Dollar Shave Club), according to CB Insights; also in 2014, Valiant backed two (Instacart and Uber) but none last year.
"As IPO markets go sideways, it makes sense that they'd be shying away from that asset class," said Mr Ilan Nissan, a partner at Goodwin Procter, which advises hedge funds and venture capital funds.
But venture firms are getting a vote of confidence from limited partners - the endowments, pension funds and other institutions that back venture funds, WSJ said.
This could extend the life of some struggling start-ups but also prevent a shakeout that some say is necessary after valuations inflated to unsustainable levels in recent years.
Firms like Accel Partners and Founders Fund have raised new billion-dollar funds in recent weeks, while other reputed firms like Kleiner Perkins Caufield & Byers and Andreessen Horowitz are also looking to raise funds.
"From October to a couple of weeks ago, there was a huge swell of funds coming through," Mr Mike Kelly, managing director at investment firm Hamilton Lane, told WSJ. He said his firm has become more selective, looking for managers that have been through a downturn.
Venture capital firms typically raise new funds every three to four years, collecting 2 per cent to 3 per cent annual management fees as they invest in start-ups. The funds usually stay open for 10 years until they distribute profits to investors, keeping 20 per cent to 30 per cent of the gains.
In recent years, venture firms have written bigger cheques and encouraged companies to spend to battle for market supremacy.
Some venture capitalists say the fund-raising spike is timed to ensure that paper gains on start-up investments still look attractive.
But valuations are already shrinking for some start-ups with money-losing business models, including food delivery company DoorDash and software firm Couchbase, according to corporate documents.
The lack of a single tech IPO so far this year shows that Silicon Valley's paper winners could fall further before investors can cash out through public listings.