Although the 2016 venture capital market was characterized by prudence and caution, venture activity in 2017 ran at breakneck speed. In our latest State of Venture Capital Industry report, we recap the trends and data behind a whirlwind year for VC and answer the question on everybody’s minds: what does this mean for 2018?
The Fundraising Market Was Robust, And Capital Remained Concentrated
There was less capital raised in 2017 compared to 2016, but there was an 11% increase in the number of funds raised, and the velocity of capital invested into funds remained strong. The number of seed/early-stage funds increased by 18%, setting a new all-time high after 2016, and the average time to close a venture fund fell from approximately 19 months to 16 months.
Overall, even with less capital raised than in 2016, fundraising levels in 2017 were historically high and have continued an upward trend since 2009.
Even with fewer mega funds emerging in 2017, venture capital investors’ “flight to quality” continued, as 24% of total venture capital funding was raised by just 1.0% of total venture funds.
The “flight to quality” has been a long-term trend in the venture market as experienced investors with unique and sustainable competitive advantages, strong track records, and excellent reputations continue to raise sizable pools of capital today.
It Was A Banner Year For Invested Capital, Especially For Early-Stage Investing
Investments in venture-backed companies reached a new high in 2017, even as the number of deals completed decreased 7.0% since 2016. A total of $91.9 billion was invested across all venture capital stages, a new record after the previous high of $86.9 billion invested in 2015. Average deal value across all stages was $11.4 million, an increase of 23% from 2016.
This jump could be attributed to increased late-stage investment activity and a continued tendency for large, venture-backed companies to leverage private capital to fuel their growth. With companies staying private for longer than ever before, competition among late-stage investors – including SoftBank’s Vision Fund, T. Rowe Price, and Tiger Global – pushed late-stage investing to an all-time high in 2017 with $50.1 billion of capital invested.
It was a notable year for early-stage investing as well, in terms of both capital allocated and average round sizes. Last year set a new record for capital invested in early-stage companies ($34.7 billion), and average round sizes rose by nearly 31%.
The shift towards larger early-stage financings demonstrates another trend in the venture market, whereby investors have seen increasingly more mature companies raising Series A and seed rounds. The higher caliber of young startups has led Series A rounds to more closely resemble traditional Series B rounds in terms of size, participants, and pre-money valuations. Likewise, seed rounds today have come to more closely resemble traditional Series A.
Valuations Climbed As Exits Disappointed
With a record-breaking year for invested capital, valuations unsurprisingly reached new heights in 2017. Last year broke two more records in seed- and early-stage pre-money valuations, which increased to $6.4 million and $20.6 million, respectively. Not to be forgotten, late-stage pre-money valuations increased 18% to $65 million after declining in 2016.
Venture capital exits were a different story. Compared to 2016, last year was a good outcome for tech IPOs, but compared to the high expectations leading into 2017, it was not great. Almost 60 venture-backed companies went public, a 40% increase from 2016, and the median market cap was $422 million – the highest since 2011. According to Renaissance Capital, these totals may have been higher had it not been for the availability of private capital, uncertainties over tax legislation, and the disappointing debuts of Snap and Blue Apron in early 2017.
M&A activity continued a two-year trend of decreasing volume and increasing value. Yet while corporations were less acquisitive in 2017, possibly deterred by high valuations, private equity funds were more active than usual. Private equity buyers represented over 18% of all exits in the U.S. and Europe, an increase of nearly 14% from 2016.
What Lies Ahead?
With the amount of capital in the venture ecosystem – including from traditional investors, corporate investors, sovereign wealth funds, and, of course, SoftBank – we expect 2018 to be another historically high year for venture capital fundraising, deal volume, and valuations. The IPO market may accelerate following the successful debuts of Dropbox, Spotify, and Zscaler, while the M&A market could be poised for a standout year as companies such as AppNexus, GitHub, and PillPack have agreed to be acquired for $1 billion or more.
Looking more broadly, the opportunities for technology investing have never been more exciting. Large paradigm shifts are underway, particularly in artificial intelligence and blockchain technology, which are expected to drive innovation for decades. While the industry continues full steam ahead and there is much cause for excitement, 2017 might also be remembered as the year allegations of sexual misconduct rocked the industry. Next year, in addition to reporting on changes in statistics and trends, we also hope to report that the venture capital industry has made strides in becoming a more inclusive one that treats all of its diverse participants respectfully and equitably.
