Venture Activity in 2016

Much innovation in health care, and other industries, is funded by venture capital firms (and their PE cousins).  The National Venture Capital Association has released its full year, and fourth quarter, 2016 report on venture activity.   (NVCA Report)   The venture capital cycle goes from the VCs raising funds from limited partners to the investment of those funds in promising companies to an exit event for the VC firm, usually either a sale or an IPO, leading to returns to limited partners, who hopefully will be so pleased with their returns that they contribute to another fund raised by the VC firm.  The NVCA report covers all these activities.  On the fundraising front, in the fourth quarter of 2016, $7.3 billion was raised by 50 funds, and for all of 2016 the total was $41.6 billion in 253 funds.  But notably, seven funds each raised over a billion dollars, accounting for 23% of all funds raised.

On the investing side, in the fourth quarter $12.7 billion was invested in 1736 companies, with the full year totals being $69.1 billion in 7350 firms.  2014, 2015 and 2016 marked a sharp jump in dollars invested over the prior few years, and that peak may be easing off.  Of potential concern is the ongoing decline throughout 2016 in seed and angel financings, which are necessary to get companies started.  $6.6 billion was invested in 4115 early stage financing rounds, a decline from 2015, but the average size of a financing increased.  First financing rounds declined from 3333 in 2015 to 2340 in 2016.  Late stage deal numbers were more stable, but still showed a year-over-year decline.  Health care devices and equipment, health care services and pharma/biotech each showed declines in deal numbers and dollars invested, consistent with the general trend.

In regard to exits, the IPO market was weak, with only 39 venture-backed IPOs in 2016, half the number from 2015 and the lowest since 2009.  On the other hand, M & A exits were relatively available, with .   Total exits in 2016 were 726 worth $47 billion, compared to 961 in 2015 worth $50 billion.  Obviously, the average exit size increased in 2016.  There was a sharp drop in exit activity in Q4, to 142 worth 6$6.8 billion.  Overall, venture firms appear to have plenty of capital to invest, but are probably being a bit more cautious on valuations.  The IPO market could strengthen in 2017, giving a boost to exits, but in any event M & A exits are likely to be strong, given potential tax and regulatory changes that may remove improve valuations.