United States: Venture Capital Coast To Coast – January 2015

Last Updated: February 5 2015
Article by Richard S. Grant and Steven J. Keeler

VC Watch

2014 was a BIG year for VC investment and fundraising.

Post-Bubble Records Driven by Large Deals

Concern over higher valuations? Apparently not, as $59 billion invested in 2014 breaks the post-crisis record. LPs also set a post-crisis record with $32 billion in commitments to U.S.-based VC funds. PitchBook Data, Inc., Venture Industry Report (2015 Annual). 2014 saw fewer late-stage deals, but several larger ones, as VC-backed companies are waiting longer to do IPOs. The robust public markets have created large chests of corporate cash. This fueled M&A exits of VC-backed companies like WhatsApp (acquired by Facebook). The dollar value of acquisitions, IPOs and buyouts of VC-backed companies in 2014 almost doubled that of 2013. Like investment transactions, however, the number of exit transactions was down for the second year since 2012.

So Seed Funding is Up

This overall ramp-up in both fundraising and investments produced a lot of seed VC activity as well. 2014 saw the largest number of seed VC deals since 2009. CB Insights, www.cbinsights.com. In terms of dollars invested, within the less than $5 million seed round spectrum, $1 million to $5 million rounds increased and sub-$1 million rounds took a smaller share. PitchBook notes that the increased use of convertible bridge notes may explain this in part. CB Insights notes that, although other publishers such as Thompson and Dow Jones interpret the 2014 data as suggesting seed venture capital is in decline, this is not the case. In particular, it points to the record number of micro-VC funds being formed (see "VC Players" below) and the 138 active seed stage firms that did at least four deals each in 2014 (and this does not even include corporate VC). CB Insights further notes that Series A deals (which are important to seed investors) have held steady, and seed investor sentiment is actually improved by high valuations. www.cbinsights.com.

Early Stage Still in Decline

The 2013 decline in early stage investment, as compared with both seed and later stage, continued through 2014. The success of seed stage and large later stage deals seems to have slowed the flow of money into Series A rounds, although, as mentioned above, Series A rounds remained steady or slightly above 2013 levels.

VC Players

Small Funds Win More Than Half of 2014 Commitments

In the shadow of seven "mega" fund closings, 111 funds under $50 million each closed in 2014. That's a 10-year record. Interestingly, more than half of the 2014 fund closings were sub-$50 million funds, and the total number almost tripled the 2013 level. Funds in the $50 million to $100 million range were a close second in terms of the number of funds closed. PitchBook Data, Inc., Venture Industry Report (2015 Annual); www.cbinsights.com.

VC Hubs

The Big Apple Shines: Internet and Mobile

While California bounced back to attract almost 60 percent of all VC funding in 2014 ( CB Insights, www.cbinsights.com), New York-based companies raised over $1 billion in each quarter of 2014. 2014 investments in New York were up 53 percent over 2013. Of those rounds, 63 percent went to Internet firms, and the mobile sector was in the No. 2 spot at 19 percent of the deals. CB Insights, cbinsights.com/venture-capital-2014.

Austin – Building a VC Ecosystem for Success

Texas is second, behind only California, in population, GDP, technical employment and university research and development. And now, Austin is leading a surge in VC activity, following the Los Angeles and New York scripts: revenue-generating companies in many industry sectors.

While venture capital investment in Dallas and North Texas fell in 2014 after rebounding in 2013, it was up for Texas overall (both in deal number and dollars), thanks in large part to Austin. PwC/NVCA MoneyTree Report; Data: Thomson Reuters. Austin took in most of the Texas VC investments in 2014. Much of this was due to solar company Sunnova Energy Corp.'s $250 million raise. Austin has developed a formidable VC infrastructure and is home to a growing number of promising startups and VC funds. The funds include Austin Ventures, Texas Emerging Technology Fund, Sevin Rosen Funds and Silverton Partners. Like Los Angeles, Austin is attracting entrepreneurs in software, mobile, media, cleantech, biotech, retail and semiconductors. www.builtinaustin.com. Thanks to its startup incubator, Capital Factory, Austin is becoming a good and relatively inexpensive place to start and grow a business. We expect to hear more about Austin startups like VoterTrove (voter data analytics for campaigns), Chiron Health (doctor-patience video conferencing), Togga (fantasy sports statistics aggregator), VChain Solutions (supply chain training) and Clarify (media data platform). www.venturebeat.com. Thanks to Austin, Texas is now fourth behind California, Massachusetts and New York in venture investment. www.privateequity.com.

VC Verticals

Mobile Sector: Mega Deals and Early Stage Interest

The 2014 statistics were certainly swayed by ridesharing star Uber, which raised $2.4 billion in 2014. With a $1.6 billion convertible debt investment by Goldman Sachs, Uber has raised a total of $4 billion. And, despite pushback by many U.S. and foreign regulators, many see an Uber IPO on the horizon. With additional help from large VC rounds for Snapchat, Instacart and Square, mobile sector VC funding was up 109 percent in 2014 over 2013 funding. While the large deals drove the dollar figures, seed and Series A deals constituted 70 percent of mobile sector VC transactions.

Healthcare: Fundraising Challenges and IPO Successes

2014 also set a record for VC-backed healthcare company exits in terms of dollars, but the deals were fewer and larger. Healthcare IPOs were a headline. While biotech has to compete with software and mobile companies for VC funding, biotechs led the 2014 IPO tally with 56 (and more than 60 when non-biotech healthcare companies are included). PitchBook predicts that biotech IPOs will slow in 2015, as so many companies debuted in 2014. VC investment in software has continued to climb as investors appear to be looking for quicker returns. 2014 VC investment in healthcare was one-half of its 2009 level.

VC Tips

Discounted Stock Options: Careful with the Tax Traps

VC-backed companies routinely provide their employees with equity incentives to supplement compensation packages and align the interests of founders and key managers. Some companies grant actual stock (coupled with 83(b) elections) while others issue stock options. Incentive stock options (ISOs), which permit exercise without incurring a tax liability (on the "spread" between the exercise price and the stock value), are subject to cumbersome requirements. As a result, "non-qualified" options have become more popular. Unlike ISOs, non-qualified stock options may be granted with an exercise price that is lower than the current stock value, but these "discounted" or "in-the-money" options can create costly tax consequences for the recipient if they are not properly structured.

Many people incorrectly assume that no tax is triggered upon the grant of these options, but only when exercised. While that was true under prior law, since regulations were issued under Internal Revenue Code Section 409A, discounted options are treated as a form of deferred compensation that may result in taxable income upon grant. This can occur even if the options are unvested. The consequences can be severe – a regular income tax on the difference between the exercise price and stock value, plus an extra 20 percent in tax and interest.

The rules are complex, but an option can avoid Section 409A taxation if the option is not exercisable before the earlier of (i) the date the employee's employment terminates or (ii) a change of control transaction (e.g., a company sale to a third party). The option may also avoid 409A taxation if it is exercisable and actually exercised only on a future date or event such as termination, a company sale, death or disability. In addition, options that are designed to be exercised, and are actually exercised, within two and a half months following their vesting dates may avoid adverse tax consequences.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.