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Third Quarter Venture Capital Activity

By October 11, 2016Commentary

Time to check in on the status of venture capital activity, courtesy of the National Venture Capital Association’s Venture Monitor report for the third quarter of 2016.   (NVCA Report)  The economy, while not in a recession, has been weak for an extended period and it is reasonable to think that this affects venture activity.  Funding of companies, however, remained strong in the third quarter, as almost $15 billion was invested in around 1800 firms.  While the amount invested is on pace to be similar to that in 2015, in 2016 fewer companies are being funded.  Average deal size is up, which may reflect later stage financings.  For angel and seed rounds, the median is around $1 million; for early venture firm rounds, about $5.4 million and for later stage VC rounds, $10 million.  As a percent of all financings, sub-$10 million financings have declined, while $25 million-plus ones have increased.  There were 898 Q3 angel and seed financings, a decline of 13% from Q3 2015.  But the mean size of these early investments has increased.  Early stage deals also declined in number, to 657, down by 12%.  There were several very large early stage financings in the quarter, which skewed average deal size higher.  Late stage financings also decreased, to 355 from 429 in the year-earlier quarter, and total investment at this stage was down 40%.  And again in these later stage transactions, there were a number of very large financings.  Software, media and commercial services were leading categories for investment.  Life sciences by number of deals and dollar investment has declined significantly since 2015.

Other aspects of the venture cycle also seemed vibrant.  In Q3, venture capital firms received $9 billion in new commitments, bringing the total for the year to $32 billion in 201 closed funds.  The median time to close a fund, however, rose to 18 months but a higher percent of funds hit their fundraising targets.  Much of the fundraising activity undoubtedly represents re-investment by limited partners, as there have been a number of exits which provide liquidity on prior investments.  While the IPO market has been challenging, as only 14 venture-backed companies went public, raising just over a billion dollars, exits via merger or acquisition continued to be an option.  Total exits in the quarter were 162 with $14.6 in reported exit value.  For the year-to-date, there have been 535 exits with a reported value of $39.  Exits are on track to at least match those in 2015.  Overall, the venture sector continues to be healthy.  For health care investors, the trend is not as strong as for some other sectors.  This may reflect political and regulatory uncertainties, especially for biopharma.

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