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Pacific Northwest Companies Seeing Increase in Venture Capital Investment

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By Alice Yin

Venture capital investors are increasingly adding to their portfolios in the Pacific Northwest. A sizable $959 million was invested through 86 venture capital deals in the region during the second quarter, up from $729 million invested in the area among 79 deals in the first quarter, according to PitchBook data.

This total also surpasses the second quarter 2014 venture capital investment total of $711 million into 89 deals in the region, which includes Idaho, Oregon and Washington, the Seattle-based private equity and venture capital research company reported.

Upon a closer look into the median pre-money valuations, PitchBook found that companies are getting higher and higher valuations before their investment deals. This quarter saw a median pre-money valuation of $21.31 million. Combined with the atypically lucrative $46.68 million last quarter, the year is already averaging out nicely to a $33 million total, versus the $18.21 million from around this time last year.

However, the drop from $46.68 million to $21.31 million this quarter is to be expected, said PitchBook Senior Financial Writer Alex Lykken. With an ecosystem for venture capital only one-tenth as big as Silicon Valley, Seattle ranks as the fifth biggest metropolitan area for startups, he said.

“Seattle is not such a big market compared to Silicon Valley, so quarter to quarter there’s divergence, because one or two companies are huge amounts to skew the data,” Lykken said.

Lykken said the rising pre-money valuations result from companies staying private longer. The new route is to stay private, gain revenue and justify higher pre-money valuations.

“You’re not seeing them exit as quickly as the late ’90s and early 2000s,” he said. “As you find investors willing to front money for these companies to stay private, the companies are still growing.”

This pattern also can be attributed to new ideas coming in waves. Lykken said novel concepts, such as Uber’s car-sharing model, are met with a flood of other founders and startups pitching early stages to lure in venture capital investors. “That factors in,” Lykken said.

Pharmacy and biotechnology startups did especially well in the Pacific Northwest, with $255.6 million invested this quarter in six deals. These companies surpassed software businesses, which received $117.6 million among 27 deals.

“When you get into specific areas like Seattle or the Northwest, a lot of startup ecosystems will always be influenced by what has already worked,” Lykken said, alluding to the presence of science research and technology veterans such as the University of Washington and Microsoft Corp.

Privateer Holdings, a Seattle-based private equity firm investing in the legal marijuana industry, was the deal reported with the quarter’s highest valuation: $415 million pre-money. The company’s success may pave the way for Seattle to be the “ground zero” for investing in marijuana startups, Lykken said. With the state’s legalization of recreational marijuana placed in effect in December 2013, Washington became a unique region where regulations and business culture intersected for such a growth rate to take place in Privateer, he said.

Despite the startup fervor, Lykken said Seattle likely will not exactly follow in Silicon Valley’s footsteps. The Bay Area easily gets about 2,000 deals each year, while Seattle has only risen to about 200.

“Our pace of growth isn’t as explosive,” he said. With older, smaller companies, Seattle opts out of riding the trend of flashy names like Uber or photo-sharing app Instagram, he said. “We don’t have that preponderance of ‘unicorns’ up here,” he said.

“The Seattle tech scene has been around so long,” Lykken added. “The latest boom affected Seattle but because we have been an active area for so long, I don’t think you see quite the same effect … local investors and startups have a good memory of what happened in 2000, so I don’t think you’re going to see them have much of the fever.”

However, that doesn’t isolate Seattle from the phenomenon happening in San Francisco. Housing rents are coming up to the Northwest, Lykken said, as some San Francisco firms, such as Google, Facebook and cloud storage company Dropbox, are moving satellite campuses into Seattle.

While Lykken expects to see startups continue to flourish, he is unsure of the future past mid-2016, though “across the board there will be a correction at some point,” he said. “But Seattle’s tech has been around for 30 years, and it’s not a boom and bust here right now. In the end, Seattle is still going to have Amazon and Microsoft and Boeing to fall back on.”