The Venture Capital Activity During The 3Q16 by PitchBook

Executive Summary

We are excited to release this inaugural issue of the PitchBook-National Venture Capital Association (NVCA) Venture Monitor. The result of a partnership forged between the leading source of private capital data and the venture industry’s flagship trade association, the PitchBook-NVCA Venture Monitor serves as the definitive source of information and analysis about venture capital activity in the entrepreneurial ecosystem. From fundraising to investment to exit, the Venture Monitor paints a complete picture of US venture activity in one comprehensive report each quarter.

Headquartered in our nation’s capital, NVCA’s primary mission is advocacy and working with policymakers to implement a policy agenda to strengthen the entrepreneurial ecosystem. Viewed as a small, cottage industry in the minds of policymakers, it’s always a challenge for venture capital to command a lot of attention in our nation’s capital, especially when competing for airtime with large, entrenched industries. However, as policymakers and other stakeholders better understand venture capital and the unique and irreplaceable role it plays in our economy, more attention is being paid to the issues that matter to our ecosystem.

Most recently, the venture industry reached an important milestone in August when five venture-backed companies—Apple, Alphabet (Google), Microsoft, Amazon, and Facebook—held the top five spots as the most valuable companies in the world by market value. Knowing that these powerful brands, and their 530,000 employees, all trace their roots back to venture capital, it’s not surprising to see venture capital continue to flow to the next generation of great American companies.

In the third quarter, close to 2,000 investors (namely venture capital firms, corporate venture capital firms, angels, accelerators, and incubators) deployed just short of $15 billion to nearly 1,800 companies in the entrepreneurial ecosystem. These investments spanned 48 states and the District of Columbia and across companies operating in a range of sectors, showing the true reach of the venture ecosystem. The extent of this reach was apparent with investments in companies like CVRx, a Minneapolis-based medical device company developing technology for the treatment of high blood pressure and heart failure; Dallas-based StackPath offering cybersecurity solutions via a web-based security platform; San Francisco-based game development company Unity Technologies; and Cambridge-based Moderna developing alternative treatments for a range of disease conditions. In each case, these innovative companies are driving value creation to our economy, shaping society, and improving the health and wellbeing of our citizens.

[drizzle]Knowing of the transformative changes being driven by these venture-backed companies, investors in venture capital funds, such as endowments, foundations and pensions, continue their strong interest in the asset class. Third-quarter fundraising totaled $9 billion, bringing total funds raised for the year to $32 billion. At this pace, it’s likely 2016 could be one of the best fundraising years in recent memory. This isn’t surprising given that investors increasingly want exposure to high venture capital returns, especially in a low interest-rate environment, as well as a front row seat to innovation.

Naturally, much of the recent attention on the ecosystem has been on the exit environment, as 2016 has proven challenging for venture-backed technology IPOs. In the third quarter, 14 venture-backed companies went public, raising $1.04 billion, and creating over $5.7 billion in public company market value. M&A remains the most likely exit route for venture backed companies, and although the pace of exits via acquisition continued to slow for the fourth straight quarter, the median acquisition/buyout price crossed $100 million, reaching an eleven-year high.

Venture Capital – Overview

For some time now, we’ve maintained that the US venture industry is undergoing a regression to the mean. At its current pace, year-end venture capital invested could hit $74 billion for the entirety of 2016—the second-highest tally of the decade. Even if venture capital invested in the fourth quarter is as low as 3Q’s tally, 2016 could still top 2014’s figure. Simultaneously, however, that massive sum of capital is concentrated in fewer financings, with annual deal flow set to decline by 22% relative to the heights of 2015.

Venture Capital

The decline in deal flow has been softer than some might have expected. As companies have secured massive amounts of capital over the last few years, investors have looked to utilize a more targeted approach to how they invest, which encompasses making fewer but larger bets.

Venture Capital

And to that point, 2016 is on pace to record over 600 financings of $25 million or more, in line with the 637 observed in 2014. In addition, median financing sizes still remain at near-record levels, three-quarters into the year.

Venture Capital

The role of corporate venture arms must also not be discounted. As detailed below, 2015 saw an unprecedented $32.9 billion worth of total transactions that included corporate VCs; through September, this year has already seen $26.1 billion. Especially in technology, M&A has been critically important to many corporate giants as they see their legacy businesses slow. Before some companies may look to invest capital directly off their balance sheets, corporate VCs can play a pivotal role in helping their parents gain exposure to cutting-edge technologies. With that, parent companies can use their investment arms as an educational vehicle to help drive their future corporate development initiatives. These rationales have motivated corporate venture arms to maintain a significant investment pace, which in turn has helped soften any slide, particularly in total financing value.

Investors still have plenty of money to deploy, overall returns for venture capital as an asset class are compelling enough for limited partners to maintain allocations, and plenty of entrepreneurs are still starting companies and courting funding. Lastly, many emerging technology platforms such as IoT, blockchain, virtual reality, immunotherapies, etc. will continue to pave the way for additional innovations and market opportunities.

Venture Capital

Declines must be put in historical context

Angel & seed activity in the US

898 deals were completed at the angel/seed stage during 3Q, a decrease of roughly 13% quarter over quarter and the first time there were fewer than 1,000 completed deals in a given quarter since 4Q 2012. The dramatic fall in activity since 2Q 2015, however, must be contrasted with historical norms. Capital invested through angel deals in 3Q was higher than any quarter prior to 3Q 2014, and overall deal activity in angel and seed deals holds strong against pre-2013 levels. Angel deal value is slated to decline for the first time YoY since 2008, yet may still become the second-highest total by year.

Seed investment in particular has shifted further into the venture lifecycle in recent years, aligning more closely to early Series A deals of the past. Due to the rise of accelerator programs, as well as the number of pre-seed and angel investors, seed capital is often also no longer the first investment in a startup. Micro funds have become more common over recent years—more than 100 were raised each of the past four years— allowing seed investors to provide higher amounts of capital. The median seed deal value has made an enormous jump to $1.5 million during 2016, 50% higher than the median of 2015 and triple

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