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Q1 2018 Venture Capital Activity

By April 12, 2018Commentary

2018 appears to be off to a hot start for venture capital activity, according to a new Venture Monitor report.   (Ven. Mon. Rot.)   1683 companies received a total of $28.2 billion in funding in the first quarter, a record high since 2006.  The number of companies being funded declined sequentially and year-over-year, continuing an over-year-long trend, which coupled with the increasing trend of total investment dollars, suggests that median deal size has increased.  For early stage rounds, the median size was $9 million in the first quarter and for late stage companies it was $15 million.  Much of the funding continues to go to so-called unicorns, or private companies with a market value in excess of $1 billion.  Angel and seed activity dropped somewhat, although median seed rounds increased to almost $2 million.  First financings continued a steady decline in the quarter.  This early stage activity is to me the most important aspect of venture activity, because that is where the encouragement of innovation is strongest.  Software and health care are the two sectors continuing to attract the most financings and dollars committed.

Exit times continue to lengthen; partly a reflection of continued lackluster IPO markets and of an uncertain M & A market, as companies are likely thinking about their debt positions.  It may also reflect the sheer number of private venture-backed companies hoping to be acquired.  There were 144 mergers or acquisitions of venture-backed firms in the first quarter and 15 initial public offerings.  Venture firm fundraising provides the backdrop for a robust venture financing market.  Venture firms have raised $160 billion since 2014, and in the first quarter, 54 funds raised $7.9 billion.  The venture environment is basically solid, notwithstanding some declines in activity.  At some point, firms get concerned about whether the investments they make can generate the returns expected, and activity slows.  I think that is happening now, especially in health care, where a lot of digital and IT investments aren’t showing any sustained revenue growth or demonstrating value to customers.  The product side of health care continues to be quite robust, since those pharma and device sectors have been able to maintain good price growth and elude damaging regulation so far.  Innovation is a double-edged sword in health care; it could cure costly diseases and conditions, but it can also heap massive cost of treatment increases on the system.

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