Why you should care

Because Amazon, Twitter and Uber all started out with some VC assistance.

Harry Weller, a former Navy fighter pilot, sits as a director on 14 company boards. And the partner at New Enterprise Associates, one of the world’s largest venture capital firms, has it down to a science when it comes to working with each one, whether they’re in online security or predictive modeling. He can knock off three board meetings in quick succession in, say, Boston, and be back home in Washington, D.C., in time for dinner. “Great venture capital is artisanship,” Weller says. “You have to be there to get your hands dirty.”

Financial markets may be swooning, but the VC juggernaut, which has nurtured some of the most iconic companies of our time — think Amazon, Twitter and Uber — just keeps on growing. It’s even expanding in China, despite its slowing economy, where the number of deals has ballooned from about 250 in the first quarter this year to more than 430 in the most recent period. Globally, as stock markets hit the skids in the last quarter, venture capital financing rose by 88 percent around the world, to nearly $40 billion, compared with a year earlier, according to the data company Preqin. “People are taking really long-term bets, so there isn’t that wild fluctuation,” says Bobby Franklin, CEO of the National Capital Venture Association, a trade group.

Why is VC flourishing as the stock market founders? Even though day-to-day market movements can affect this corner of the financial industry, VC mostly marches to its own tune, especially as it has increasingly gone global along with the companies that investors support. Part of that appetite, of course, is driven by the interest in more social networks (Pinterest, Snapchat) or services delivered through online portals (Airbnb, Dropbox). Other industry experts point to revolutionary ways that companies are changing how they use computing power. “We’re at the early stage of a significant technology transition,” says Scott Kupor, partner at the Silicon Valley–based Andreessen Horowitz. If true, that spells big opportunity — if investors can wait it out.

Like buying fine Bordeaux, if you don’t stay on the list for the bad stuff, you can’t buy the good years.

It wasn’t always this way. The VC industry earned a mixed reputation in the late ’90s, when it poured money into practically any little startup with a dot-com suffix, pumping up the bubble until it popped in 2000. VC firms went bust by the dozens, as investors stopped paying for cash-burning dreams. Only the fittest survived and made money — those with the financial resources and the right mega investments. “There’s that once-in-a-decade vintage that makes up for all the crap,” says Weller. But like buying fine Bordeaux, if you don’t stay on the list for the bad stuff, you can’t buy the good years.

Still, it’s not the same industry that went on to nurture Amazon or Facebook. The emergence of blockbuster VC firms — like NEA, Andreessen Horowitz, Sequoia Capital and Benchmark — has led to a “barbell effect,” says Kupor, with the large guys being balanced out by hundreds of small boutique ones that nurture tiny companies. While some of their teeny companies are flourishing, massive private ones, like Uber and Airbnb, are bulking up, opting to stay private much longer than in the past and helping big investors capture the growth before going public. Companies are now staying private for an average of 11 years, up from seven years in earlier decades, says Kupor. That has resulted in the largest-ever number of unicorns, or private companies worth more than $1 billion, with over 140 and counting, according to data provider CB Insights.

Some have called today’s proliferation of highly valued private companies a ’90s-style bubble. Over the past year, a string of difficult initial public offerings, when companies sell their shares to the public for the first time, suggests private investors might be paying too much for their stakes in high-growth companies that don’t earn profits. In fact, IPOs have dropped by more than half in the third quarter this year compared with the second quarter, according to the NVCA. That’s created a ripple effect through the industry, forcing valuations lower, delays in businesses that want to go public and possibly eventually forcing smaller VC companies out of business — when they can’t put up the money to keep startups going. “It will cause a winnowing,” says Weller. “It’s a frigging hard business.”

Of course, it’s that gleam in the future that keeps venture capitalists going, a world of quantum computers and neural networks, arrays of computers interacting almost like cells in a living organism. “Dream it, make it, sell it,” says Weller. Just maybe, then, they’ll find the right company that can make billions doing that.

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