Thinking About Early Stage Venture Capital Investments in 2015

By most measures, 2014 was a fairly positive year for the private equity industry, in particular early stage private equity (typically known as venture capital). The relatively decent performance of private equity over the past few years has some analysts wondering whether the industry is approaching a business cycle peak. The concern for an industry peak only heightened recently when looking at the enormous valuations some later-stage startup companies are receiving.

Could 2015 turn out to be the peak year for the industry?

Venture Capital Commitments

Here’s a look a venture capital commitments from 1985 to 2014 (an interactive version is available here). Does it look like the investor – the one who puts up the capital commitment – is thinking the industry is peaking? Probably not.

The figure is divided into four quartiles.  The first quartile is the lowest 25% of the sample.  The gray area between the lower quartile and the median are the 25th to 50th percentile years.  The light gray area between the median and upper quartile are years in the 50th to 75th percentile of venture capital commitment years.  All years above the upper quartile are years when commitments were in the upper 75th percentile of all years.

The Tech Bubble and Housing Bubble

It’s impossible to miss the technology bubble, peaking, in terms of venture capital commitments, in 2000 at $101 billion.  The years around 2000 were not too shabby either at $54 billion and $39 billion. Interestingly, the 2005 to 2007 period also saw commitments reach the upper quartile, with the height occurring in 2006 at $31 billion.

Today’s Commitments

Fast forward to today’s situation. It’s hard to argue, at least when looking at the historical experience, that the venture capital industry is in the middle of a bubble.

Sure, the industry continues to receive commitments growing at annualized double digit growth rates, but the double digit growth rates are nowhere near enough – yet – to bump commitments made by investors to the venture capital industry into the upper quartile.

How far away are commitments before the upper quartile is reached?

Total venture capital commitments came in around $20 billion in 2014.  The upper quartile starts at $26 billion, meaning that the 2014 commitment figure is 30% below any potential “bubble” indicator.

Bottom line: the industry has some room to grow before any concern about a commitment bubble is reached (valuation may be another issue, although the two are somewhat connected).

Looking at Venture Capital Commitments as a Percentage of Total Private Equity Commitments

Simply as further inspection of whether the venture capital industry is peaking, here’s a look at the venture capital industry’s take of the total private equity investing pie. As shown (an interactive link is available here), venture capital’s take is still below average at 24% (the historical average is 28%).

Fascinatingly, the venture capital industry’s take peaked in 2000 at an astounding 56%.

Conclusion

Overall, 2014 was a strong year of growth for most stages in the private equity universe, including early stage venture capital. In looking at the historical cycle of venture capital commitments (in both absolute dollars and as a percentage of total private equity investments), the industry appears to have a good deal of growth left before any discussion of a peak is useful.