Startups Are Raking In Money at Rates Not Seen Since the Dot-Com Bubble

Future Tense
The Citizen's Guide to the Future
July 16 2012 2:02 PM

U.S. Startups Rake In Most Venture Capital Since Dot-Com Bubble

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Companies that build mobile apps, like the photo-sharing service Instagram, were among the biggest beneficiaries of a windfall in venture capital funding last quarter.

Photo by Thomas Coex/AFP/Getty Images

U.S. venture capital firms splashed out more money in the second quarter of 2012 than they have in any quarter since the dot-com boom, according to a forthcoming report from venture capital database CB Insights. (The report will be online here once it’s published.) In all, they invested $8.1 billion in a total of 812 companies, with the mobile and Internet sectors leading the way.

Whether you see this as cause for celebration or alarm depends on your degree of bubble-phobia. The last time funding was this high, in the second quarter of 2001, a devastating crash ensued. There are plenty of people out there who will tell you that the huge valuations for companies like Facebook, Instagram, and Groupon are signs that another pop is on the way.

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While there are some parallels, they’re probably overstated. I’ve written before that bubble-spotting seems to have become something of a bubble itself lately, and CB Insights’ CEO, Anand Sanwal, agrees. “We don’t really see much reason to worry,” he tells me, especially since the big second-quarter numbers might be as much a blip as a trend. “Q1 was actually pretty slow, so if you add up Q1 and Q2 we’re at sort of a normal level.”

One sector that does have reason to worry is green technology. CB Insights’ figures show an increase in total funding for the sector, but that’s based on just a few big deals—the total number of deals has been declining steadily. And GigaOm last week reported that a different analysis, by the Cleantech Group, found cleantech funding down 25 percent last quarter from the same quarter in 2011. The well-publicized failures of companies like Solyndra and Abound Solar can’t be helping.

The bottom line, though, is that while other sectors of the U.S. economy struggle, the startup machines in Silicon Valley and, increasingly, New York City, continue to crank out promising-looking companies. (CB Insights’ report has some fascinating data on the rise of New York, which has bumped past Massachussetts as the nation's number-two venture capital scene.) Many of those companies will go bust, but some will reshape the way we live, especially as we put more and more of our lives on the Web and on our smartphones.

Future Tense is a partnership of SlateNew America, and Arizona State University.

Will Oremus is Slate's senior technology writer.

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