$77.3B Invested In 2015: A Peak For U.S. Venture Capital? by PitchBook
A brand-new year, a brand-new U.S. Venture Industry Report.
Carlson Capital's Double Black Diamond fund added 3.09% net of fees in the second quarter of 2021. Following this performance, the fund delivered a profit of 5.3% net of fees for the first half. Q2 2021 hedge fund letters, conferences and more According to a copy of the fund's half-year update, which ValueWalk has been Read More
With 2015 in the books, it’s clear that last year represented something of a turning point for the U.S. venture industry. As you saw on the cover, U.S. venture financings peaked in 2014, plateaued through the beginning of 2015, and have since fallen from such lofty heights. The high tide of massive, unicorn-birthing rounds and relentless upward march of valuations even at early stages were giving rise to concerned comments early in the year, but it took until the second half of the year for investor caution to manifest. Still, 2015 ended up with a truly mountainous sum of dollars invested. But that may well represent the peak of the current U.S. venture capital cycle, at least for some time. The investment environment is particularly complex right now, what with limited partners still funneling plenty of capital to venture capital fund managers as recent venture returns tick upward, concerns around Asian growth prospects persisting, and liquidity prospects staying uncertain for the short term. In addition, the pace of innovation remains swift. In short, 2016 is shaping up to be quite different than what we’ve seen in the past two years.
To keep with the freshness of the year, we’ve revamped the look of our U.S. Venture Industry Report series as well as the typical array of content. In the vein of our analyst report on Virtual Reality, we’ve included a brief overview of health-focused bio-sensing wearables, surveying current characteristics of the market and key challenges for growth. There’s a lot more in the following pages to inform your decision-making as you plan for the year, so read on.
U.S. Venture Capital Has Peaked
By all indications, financing activity has peaked in the U.S. for now. From 2014 to 2015, the number of U.S. venture rounds fell by no less than 13.7%. The quarter-over-quarter decrease in financings was more precipitous: after an elevated plateau of activity, round counts plunged by 25.8% from 2Q to 4Q. In contrast, the fourth quarter of the year saw a sum of capital invested that, while down by a fair margin from the prior four quarters, was the sixth out of the past seven to eclipse $17 billion. Consequently, 2015 ended up with a simply staggering tally of $77.3 billion in total venture capital invested. Coupling that sum with 2014 numbers produces $145.3 billion invested in venture rounds in the U.S. in the span of just two years.
Looking at yearly sums, the leap in dollars invested in that same time period prompts the inevitable conclusion that an overheating of the venture ecosystem occurred. The most recent quarterly figures, on the other hand, suggest that it is now cooling down. Breaking down activity by stage further reinforces both conclusions. There are multiple factors behind the spurt in angel/seed financing activity since 2010, ranging from economic recovery in the U.S. to reduction of key input costs to the proliferation of angel networks and syndicates, but when numbers across all stages rise that steadily, particularly at early stages, a surging tide of optimism and available capital are primary drivers.
The recent downturn in counts, meanwhile, indicates how that has shifted as of late in response to investor and founder over-exuberance that inflated round sizes and valuations, particularly at the late stage. Nowhere is this more evident than in the number of first financings, which, after sailing along for three straight years at a highly elevated level, fell steeply in 2015. Notably, 2015 still saw the most capital invested in first financings of the past 11 years, an immense $8.1 billion. However justifiable many of those fundings of fledgling businesses were, the sheer flood of dollars in conjunction with the fewest first financings since 2010 prompts the inevitable verdict that VCs were riding a precariously lofty tide of confidence.
That swell was a founder’s fundraising market, marked by an abundance of dry powder and an influx of nontraditional venture investors, as the allure of having a unicorn in one’s portfolio was all too potent. Time will tell just how sharp the correction in the venture capital market will be—barring a major macroeconomic shock, it’s likeliest there will be a gradual deflation, softened by strong fundraising, a continuous flow of capital from nontraditional venture capital investors and the relative health of the U.S. economy.
Overheating At Angel/Seed?
Angel/Seed Venture Capital Activity
Even though the total value of U.S. capital invested in angel/seed rounds remained strong in 4Q at $1.9 billion, the tally of 818 was the lowest observed since 4Q 2012. Furthermore, the drop in activity between 2Q and 4Q alone this year was a massive 32%. The significant inflation in expectations and dollar amounts at such a nascent stage appears to be getting a pushback from investors and necessitates a correction in round sizes and valuations. After all, a record proportion of angel/seed investments were $5 million or more in size in 2015, while median pre-money angel/seed valuations hit $4.4 million. Angel syndicates and networks, as well as increased activity by accelerators or incubators, could help keep financing counts from diminishing much further, but to what extent is unclear.
See full PDF below.