U.S. Venture Activity Plummets In 3Q by PitchBook
Many interesting trends have emerged in the U.S. venture industry over the past few years. Analyzed nearly to the point of exhaustion, the “unicorn” phenomenon—the boom in the number of venture-backed companies valued at $1 billion or more, coined by Aileen Lee of Cowboy Ventures—is probably the best known. The unicorn club is merely the sensationalized crest of an immense wave of venture capital that has flooded startups in the late stage of development over the past few years. Drivers of the wave are multiple and interwoven: a sustained bull run in public markets; persistently low interest rates; the JOBS Act; new, nontraditional investors entering venture rounds; rapid advances in key sectors enabling lower launch costs, etc. We’ve covered all of these comprehensively across multiple publications, even dedicating one entire report to VC-backed unicorns exclusively.
When numbers for the third quarter of 2015 came rolling in, it became clear that it was time to take a closer look at exit activity. U.S. VC is not exactly undergoing a slump, although the overall number of rounds has plunged over the past few quarters. Capital invested escalated yet again in 3Q 2015 at $21.6 billion, even eclipsing the massive sums seen in 2Q, so a slump doesn’t seem exactly the right term. Rather, it’s an alarming lack in the spread of the flow of capital, with many late-stage companies attracting a disproportionate share of overall venture funding—a rich-get-richer effect, in some cases, which could signal the approach of a peak in the cycle, especially as early stage numbers are sliding considerably. As these companies tend to be older and at a point where, in the past, investors have begun pressuring for an exit, it seemed timely to look more closely at whether historical exit data suggests liquidity on a sufficient scale is achievable. Consequently we expanded our exits section considerably, analyzing the percentages of companies that go public by amount of capital raised, as well as the acquisitions of the most prolific startup buyers, such as Google and Twitter.
We also sat down with Will Kohler, partner at Lightspeed Venture Partners—sponsor of this report—to talk about a variety of topics; we also included a special insert of content we are still developing, covering women in venture capital. For this report, it seemed apt to include a brief sample of broader datasets covering venture funding of women-founded companies, as well as a few other snippets.
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The gradual diminishing in U.S. venture activity accelerated into a plummet in the third quarter of 2015. At 1,444 completed financings, total round count is down 22% quarter-onquarter (QoQ) and 34% compared to 3Q 2014. In fact, the number of financings hasn’t been this low in a given quarter since 2Q 2011. Yearly numbers look somewhat better, with the number of financings breaking 5,000 for 2015 to date, but compared to 2013 and 2014, the decline is still evident.
It’s easy to see the drivers of that decline when looking at the levels of round sizes and valuations, both of which are implied by the totals of capital invested. Our most recent VC Valuations & Trends report saw median valuations hit new records across all stages, with Series D or later achieving a staggering $184 million median pre-money valuation and Series B no less than $41 million.
Even if the drop in the overall number of financings is steepening, dollars invested are still flowing so strongly the narrowing of the VC funnel is becoming more apparent. As the breadth of activity compresses to favor the proportion of late-stage rounds, the stream of capital has intensified. The herd of heavily capitalized, mature companies is steadily growing. In addition, a fair amount of late-stage money goes toward re-upping the ante in companies like Domo that raised large amounts just last year. Such follow-on financings imply that many are making a push for maximum growth, attempting to sustain momentum and transform paper gains into real value. Whether it is doable will largely be seen on a case-by-case basis, but we keep hearing of apprehension across the industry that if the tide of capital recedes, many are ill-equipped to cope.
What this sustained push at the late stage signals for the venture industry as a whole is a different matter. The number of first financings is considerably off the tallies of the last three years, even if capital invested is strong. As a thermometer of the VC industry, that drop suggests caution is manifesting more often. All the value creation and massive sums invested have been private, so, unlike the tech bubble, a deflation will mainly hurt the high-flying, least-prepared companies and their investors and employees. VCs know this all too well. Accordingly, they are beginning to pull back in the number of financings, if not just yet closing off the spigot of late-stage capital, although it’s hard to see that continuing to flow so heavily for much longer.