U.S. VC Activity 1Q16 Report – A Continuation Of The Cooling? by PitchBook
A continuation of the cooling? – Introduction
How quickly sentiment changes. In January, during the writing of the last U.S. Venture Industry Report, the media was awash with headlines containing dire predictions regarding venture capital activity. The nadir was doubtless the rout in tech stocks that occurred in early February. However justified many of the warnings were, particularly when it came to the need for a retilting of focus toward profitability as opposed to sheer growth, it was clear the pendulum of media narrative had overcorrected.
Now in early April, the pendulum is shifting back, albeit not as heavily. Investors are still wary, as overall activity indicates, while founders are doubtless battening down the hatches, but there is still plenty of VC flowing in the U.S. It’s just not flowing as freely as it so recently did. Positive indicators, such as the mild, recent recovery in public market performance of companies that went public in the past couple years, as well as strong fundraising, have encouraged a modest uptick in optimism. On the other hand, sustained weakness in certain developed and emerging economies is still inducing concern in global public markets, which in turn is affecting venture investment more than ever. This is primarily due to investor perceptions that nontraditional VCs—which contributed considerably to the overheating of late-stage valuations—are more exposed to macro concerns, while the scale of some of the largest VC-backed companies that have remained private also renders them more susceptible to global volatility, not to mention issues of liquidity.
In short, whether or not this is a premature rally that may soon reverse as investors assess the validity of these fears, it’s clear that the state of the U.S. venture industry has changed. We hope the analysis and datasets in the following pages help inform your decision-making, as well as your take on whether the cooling of U.S. venture activity will continue. If you have any questions or comments, don’t hesitate to let us know at reports@pitchbook.com.
Garrett James Black
Senior Analyst
A pause, not a bubble popping
Overview
Overall U.S. VC activity slowed even further in the first quarter of 2016, even as capital invested remained at a historically robust level. These numbers are in line with what we predicted in the previous edition of this report series: a gradual deflation in activity, in the initial stage of a slowing private investment cycle. Ample supplies of capital raised in 2014 and 2015, however, still incentivize VC firms to hunt for quality opportunities. Consequently, capital invested remained even stronger than expected, but that can be chalked up to timing as well as the sustained activity of nontraditional VC investors in a handful of massive late-stage rounds—$9.4 billion of the $17.7 billion invested in 1Q was in late-stage financings.
U.S. VC Activity – Softening to pre-2013
U.S. angel & seed VC activity
The impact of angel syndicates cannot be emphasized enough when looking at the below datasets. Groups of angels and Angel List syndicates have proliferated in the past few years, ramping up primarily localized activity by a significant degree. The surge has, of course, also helped lead to increased natural competition and rising investment sizes and valuations. Even with the recent slide, it should be noted that the decline left 1Q tallies around pre-2013 levels. Angels are likely to have been spooked as much as anyone else over the past several months, but syndication and healthy economic signals in the U.S. could encourage them to resume investing, albeit at lower levels. By all accounts, institutional seed investors are set to remain quite active, looking to deploy the hoard of capital accumulated over the past few years as the pre-seed and seed financing markets broadened in tandem with their institutional investor base. All in all, activity at the angel and seed stages should remain subdued, as befits an increase in risk aversion going forward. Yet investment does not appear likely to further drop dramatically.
A smaller sample of companies still produce robust results
U.S. early-stage and latestage VC activity
Even as round counts fell once more at the early stage in the U.S., the amount of capital invested remained more than robust—in fact, the $6.6 billion invested during 1Q was the third-highest quarterly total since 2013 began. At the late stage, total value remained healthy, with the number of financings actually up from 4Q. Many have overinterpreted these results as countering the narrative of a slump in VC, but the reality is not so much countering as counterintuitive: A flight to quality combined with still-abundant amounts of capital could result in sustained strong totals invested across fewer financings of proven companies. Particularly at the late stage, founders are raising now because things could get worse, potentially. 1Q numbers are more testament to risk aversion on the part of both management teams and investors than anything else.
