Disruptive technology reaps cash as venture capital pours in

Investments in software companies through the third quarter surpassed those for all of 2013

It's a boom year for venture capital investing, and tech companies with the potential to disrupt business-as-usual are grabbing the lion's share of the money.

By the end of the third quarter this year, venture capitalists poured US$13.9 billion into U.S.-based private software companies, more than any other industry segment and greater than the $11.1 billion invested in software companies in all of 2013, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters.

The money going into tech-related companies fueled car-ride service Uber, which received a whopping $1.2 billion round of funding in the second quarter, and accommodations-reservation service Airbnb, which attracted $500 million in funding. The money helps these companies offer their services to worldwide markets and a greater number of people faster than they would have otherwise.

Fueling the spending is a combination of a strong IPO market for venture-backed companies, excitement over technology that creates new business models and nontraditional investors jumping into the market.

"The big draw is disruptive technology," said Mark McCaffrey, global software leader and technology partner at PwC.

Startups are disrupting entrenched businesses and in some cases creating new industries altogether. This is attracting not just traditional VCs, but non-traditional sources of venture capital such as hedge funds and mutual funds, which are adding to the total cash flow, according to the MoneyTree report.

Startups can go global much more quickly than they used to, McCaffrey points out. For example, Internet-based companies don't need a worldwide manufacturing supply chain to go global, he said.

"Companies would start small, receive venture capital, go public and then go global; now, they can go global before they go public," McCaffrey said.

Venture capitalists invested $8.74 billion in Internet-specific companies through the third quarter, according to the MoneyTree report. The last time that investments into Internet companies surpassed that amount in an entire year was in 2001, as the dot-com boom was going bust, when $9.7 billion was invested. Internet-specific companies are those whose business model depends on the Internet, regardless of their primary industry category.

In the tech arena, investments in IT services also broke the billion-dollar mark so far this year, receiving $2.2 billion in funding through the end of the third quarter, according to MoneyTree.

Hot areas in tech also include cybersecurity and cloud technology, McCaffrey said.

Venture capital investments dipped in the third quarter compared to the second quarter this year, but that doesn't mean funding is drying up: the mega investments in Uber and Airbnb skewed the quarter-to-quarter comparison.

For all industry sectors, venture capitalists poured a total of $33.2 billion into private companies, greater than the $29.8 billion invested in all of 2013, according to the MoneyTree report.

Despite recent stock market volatility caused by tensions in Ukraine and struggling economies in Europe, McCaffrey foresees total VC investments exceeding the $40 billion mark, which bodes well for tech funding. The last time total VC investments broke the $40 billion milestone was in 2001.

Barring some huge macro economic event, some market volatility can actually be a good thing, McCaffrey noted. For example, it can help keep interest rates low, and ease tensions that build up when markets climb steadily over a long period of time.

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Marc Ferranti

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