It's a good time to be a software company in Silicon Valley, where big money is flowing to the red-hot industry.
Venture capital firms pumped about $2.3 billion into valley software companies in the first quarter of this year -- the largest quarterly investment into any industry since 2000, according to a new report released Thursday. That was nearly half of the $4.7 billion poured into Silicon Valley technology companies during the first three months of the year, which marked the biggest fundraising quarter in the last 14 years, according to The MoneyTree Report, a quarterly analysis of venture capital investments.
"The returns on investment (in software) are just too healthy to ignore for people who want to put cash into the market," said Mark McCaffrey, a San Jose-based software industry expert with PricewaterhouseCoopers, a global consulting and professional services firm.
Other industry sectors also dazzled investors -- information technology took in $566 million, consumer apps and services landed $408 million, biotechnology landed $277 million, and $363 million went to media and entertainment companies. Sharing-economy companies also received a sizable chunk of change from eager investors, who continue to rally around the Bay Area's roaring tech industry that seems to spawn a new company or funding round almost daily.
In all, the valley received half of the $9.5 billion venture firms invested nationwide in a total of 951 deals for the quarter, according to the report, which is produced by PwC and the National Venture Capital Association and based on data from Thomson Reuters
In a separate report on venture funding, Dow Jones said the Bay Area saw four of the five biggest venture capital deals in the country during the first quarter: Palo Alto-based data service Cloudera raised $740 million; ride-sharing service Lyft raised $250 million; San Francisco audio and speech technology company AliphCom raised $250 million; and Mountain View messaging app TangoMe raised $215 million.
Other landmark valley investments included Airbnb, the room- and home-renting website; online home goods retailer One Kings Lane and file-sharing and storage company Dropbox. And experts expect more big deals to come: Airbnb is gearing up to raise between $400 million and $500 million from an investment group including mutual funds and private equity firms, pushing its worth to about $10 billion.
McCaffrey said the sharing economy companies -- which use social networks and smartphones to allow people to share everything from clothes to cars for a price, and many of which are in San Francisco -- will continue to woo investors, even if they are still at odds with regulators.
"If you look at the rate of adoption and the value proposition, the horse has kind of left the gate," McCaffrey said.
Some venture capitalists, however, remain concerned that the bulk of investments continue to flow to Silicon Valley companies at the expense of other tech hubs such as Austin and Philadelphia.
"We can't have all the wealth creation concentrated in the Silicon Valley," said Venky Ganesan, managing director at Menlo Park-based investment firm Menlo Ventures. "We need it spread across the nation.''
The MoneyTree report shows venture firms invested more money nationwide in the first quarter of 2014 than any other quarter since 2001. Experts don't expect venture capitalists to return to the investing frenzy of the dot-com age -- in the gangbuster year 2000, investments hit a whopping $105 billion, a record for the last two decades and nearly four times total investments in 2013.
"I don't think any of us want to see it spike so high," McCaffrey said.
But with an abundance of mobile applications, disruptive technology such as ride-sharing and cloud storage hitting the market, experts say the money spigot will stay open. Even the recent beating on Wall Street, when tech stocks took a sharp dive, is unlikely to dissuade investors.
"It got slightly bubblish and I think this recent down turn brought the tech market back to reality," Ganesan said. "It's like a pressure cooker; you need to let some steam off."
The MoneyTree report also shows that venture capitalists are doling out record-high sums to companies -- north of $250 million in some cases, such as Uber's funding last year -- but investing fewer times throughout a quarter.
"There's fewer deals, and higher competition" for those deals, McCaffrey said. "That's generally the formula we're going to see here for a bit."
And firms are also more likely to invest in companies that have been around for awhile and proven themselves, while seed, or startup-stage, investments in the valley continue to fall. Just nine Silicon Valley companies got seed funding during the first quarter, a 64 percent drop from the previous quarter, according to the report.
Ganesan calls this "an early warning sign" for more investors to channel money back to the true startups: "To me, that's where the magic of the U.S. economy happens, the seed-funding for early stage."
Contact Heather Somerville at 510-208-6413. Follow her at Twitter.com/heathersomervil.
Here are some companies that received funding in the first quarter of 2014
Dropbox, San Francisco, $325 million
Lyft, San Francisco, $250 million
Tangome, Mountain View, $200 million
Airbnb, San Francisco, $200 million
One Kings Lane, San Francisco, $111.9 million
Palantir Technologies, Palo Alto, $101.6 million
Source: The MoneyTree, Dow Jones VentureSource