The Incredible Shrinking Seed Stage and Other Venture Trends of 2014

Opinion

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notable trends that emerged in the 2014 data:

—Healthcare (biotech, medtech, and services) killed it last year, having raised in aggregate over $9 billion (or 19 percent of total dollars raised). That contrasts to the $6.9 billion the healthcare sector raised in 2013, and clearly reflects the extraordinary investor liquidity in biotech. Average round size for healthcare was $16.5 million.

—Software companies (including Web startups) raised $19.8 billion, or 41 percent of all dollars invested in 2014.

—Media and entertainment deals more than held their own, raising $5.7 billion across 481 companies for an average round size of $12 million.

—Telecommunications came in last place of the 17 categories tracked, with only $324 million invested in 43 lonely companies.

—Nearly $7.4 billion was invested in first-time financings, or 15 percent of all dollars invested; 40 percent of the $7.4 billion was invested in software companies, mirroring the broader investment activity.

—While innovation is a global phenomenon, Silicon Valley just killed it again in 2014, accounting for $23.4 billion (or 49 percent of the nationwide total) across 1,409 companies (32 percent of the total). Interestingly, round sizes were meaningfully larger for Valley-based companies—$16.5 million versus around $11 million for New England and NYC Metro-based companies.

—New England and NYC Metro were both a distant No. 2, with each region accounting for a total of $5 billion in venture funding. Including Silicon Valley, the top three regions accounted for nearly 70 percent of all investment activity.

—Twenty states had fewer than 3 investments in the fourth quarter of 2014, and 10 of those had no venture investments at all, which amazes me.

Another exciting geography is obviously China, which showed dramatic growth, with $15.5 billion invested in 2014—or twice the previous record set in 2011, according to VentureSource, but still about one-third of the U.S. level.

In the fourth quarter alone, China invested over $6.8 billion in 243 companies. Much of the investment activity was focused on consumer-centric businesses. IPO activity on local exchanges recently returned as Chinese regulators spent nearly a year overhauling the process to take companies public to provide greater transparency for investors. There were 61 IPOs in China in 2014, with a total value of $7.2 billion. While that’s down from the 141 IPOs in 2010, it was meaningfully greater than the 15 IPOs in 2013. Clearly the “Alibaba halo” still shines bright, and there’s more to come. Chinese venture capital firms raised $4.2 billion in 2014, while U.S. private equity firms raised $47 billion.

Investment activity in Europe was also robust—$8.9 billion (or 7.9 billion euros) was invested across 1,460 companies in the Continent (average round size ~$6 million as compared to $11 million in the U.S.). Arguably, this activity was also tied to strong IPO activity, as there were 55 IPOs in Europe that raised 3.7 billion euros (compared to 2013, when 18 IPOs raised 500 million euros).

As in the states, Europe has seen innovative new funding models develop, such as “equity crowdfunding” platforms that take equity in the startups. However, the U.K. Financial Conduct Authority recently raised significant concerns when it noted that 62 percent of the investors on U.K. crowdfunding websites had no prior investment experience! The British regulators also estimated that $127 million was raised on these sites last year.

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Michael Greeley is a General Partner at Flare Capital Partners, a healthcare technology venture firm. Follow @greels1

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