Head-Scratching VC Data
Grinding through all of the 1Q15 investment data does not necessarily provide additional clarity as to where the private capital markets are heading. The number of new venture capital funds declined markedly from the torrid pace set in 2014 but new investment activity continue to crush it. Clearly non-VCs are still piling into the early stage marketplace, looking for returns.
Specifically, 62 venture funds raised $7.3 billion in 1Q15 (recently updated from the formal announcement of a few weeks ago), which was a decline of 23 percent in the number of funds but was a 26 percent increase in the amount of dollars raised when compared to 4Q14—80 funds and $5.8 billion, respectively. In 1Q14, 58 funds raised $8.9 billion, so it does appear that the venture industry has settled into a fundraising range of $20-$30 billion annually, which is what it was for much of the last decade between the recessions. It also appears that the “barbell” phenomenon of the venture industry continues along and is underscored further by some specific highlights in the 1Q15 data. As a point of reference the overall U.S. venture industry is estimated to be about $200 billion of capital under management.
- 42 of the 62 funds raised were less than $100 million in size
- Of those 62 funds, only 18 were considered “first time” funds, the largest of which was FKA Ventures, which was—truth be told—the IT investment team from Atlas Venture when the firm split up
- The five largest funds raised $3.8 billion—8 percent of the funds raised 51 percent of the dollars
- 32 funds were less than $25 million in size…4 of them were less than $1.0 million (not a typo)
- The average size was $118 million, which is a meaningless (or misleading) number when the median is $20 million
- The largest fund raised was $1.6 billion—congrats Bessemer—which was 2,909x the size of the smallest
Interestingly, the pattern of hedge fund commitments has also changed significantly in the past few years with it bifurcating to support either much smaller or very large managers. Both ends of the spectrum captured most of the dollars, leaving mid-sized managers to struggle to raise capital. In 2014, “small” hedge funds—those with less than $5 billion under management (even though one of those funds is over two-thirds of what the entire VC industry raised last quarter)—raised about 50 percent of the total $76.4 billion of hedge fund commitments. In 2012, large hedge funds raised $93 billion while these same small hedge funds suffered aggregate withdrawals of $63 billion. Whiplash.
Venture investment in 1Q15 totaled $13.4 billion in 1,020 companies. This is nearly a 10 percent decline in dollars invested and an 8 percent decline in companies when compared to 4Q14, but is an increase of 26 percent on a dollars basis from 1Q14 on about the same number of companies. Quite clearly the trend for venture-backed companies to raise larger and later rounds of private capital continues. And it is this phenomenon which further exacerbates the “funding gap” now so present in the venture marketplace. Arguably, non-VC investors have plunged into the venture asset class looking for greater returns.
It is not surprising then that seven of the top ten largest venture financings in 1Q15 were in consumer-facing companies, which have drawn so much investor attention. In fact the top ten companies raised $3.8 billion in the first 90 days of 2015, or—stated in another, more shocking way—1 percent of all companies which raised venture capital in 1Q15 soaked up 29 percent of the dollars invested. Some other interesting nuggets in the data:
- Seed activity continues to decline significantly and was only $125 million (26 companies)—admittedly, we may have a “quality of data” issue here as this seems wrong
- Expansion and later-stage rounds captured 72 percent of dollars invested in 1Q15 as compared to 61 percent in the prior quarter, underscoring the rotation to more mature companies
- The Biotech sector rocked in 1Q15, clearly driven by the biotech IPO window being thrown wide open in 2014—those 124 companies raised $1.7 billion; all in, healthcare companies raised $2.3 billion
- The largest category continues to be Software, where 434 companies raised $5.6 billion for an average round size of $13.3 million
- Sadly, the Networking and Equipment category only raised $99 million across 9 lonely companies
Liquidity ultimately drives flows of capital into the venture industry—we all know that. The industry’s ability to recycle capital is critical but may also be a poor trailing indicator of future success. This past year witnessed exceptionally strong M&A and IPO activity with $48 billion of venture-backed M&A transactions (there were 479 in all, but only 139 disclosed the transaction values, so the total is undoubtedly much higher) and 116 IPOs which raised $15 billion of capital.
The story in 1Q15 is more disconcerting as there have only been $2 billion of announced venture-backed M&A transactions (86 in total, 16 of which had announced values) and a mere sliver of IPO activity—$1.4 billion raised across 17 companies (13 of which were biotech companies). Nearly 25 percent of total 1Q15 M&A volume was due to Under Armour’s acquisition of MyFitnessPal, evidently leaving a large number of modest trade sales behind.
Clearly 2015 is off to a more measured pace, which may limit fundraising activity in 2016, although there are nearly 55 companies currently filed publicly for IPOs.