VC Activity Continues Slowdown in Fourth Quarter, and Top 10 Deals

Venture capital firms didn’t exactly take their foot off the accelerator, but the pace of VC investments continued to weaken in the three months that ended in December, extending a slowdown that began in July, according to two venture reports issued today.

The deceleration followed a strong start to venture activity during the first half of 2016, but was chalked up as a “return to normalization” in the Venture Monitor report released by Seattle-based PitchBook and the National Venture Capital Association (NVCA).

The report found that venture firms invested $12.7 billion in 1,736 U.S. companies during the fourth quarter—a 20 percent drop from the $15.7 billion that VCs invested in the previous quarter, and a 12 percent decline from the third quarter’s 1,965 deals. The numbers were down even more in comparison with the same quarter of 2015.

The fourth quarter reinforced “what we saw and heard all year, which is that the venture investment levels are readjusting after peaking in 2015,” said NVCA president Bobby Franklin in a statement released with the report.

For the year, the Venture Monitor report said venture firms invested more than $69.1 billion in 7,751 U.S. companies, which amounted to the second-highest annual investment total in the past 11 years. The peak came in 2015, when VCs sank almost $78.9 billion in 9,742 companies.

VC Activity 2016 (image courtesy NVCA PitchBook)

VC Activity 2016 (image courtesy NVCA PitchBook)

The MoneyTree Report from PricewaterhouseCoopers (PwC) and CB Insights—also released today—showed a similar trend, although the numbers varied.

According to MoneyTree data, investors deployed $11.7 billion to U.S. startups in 982 deals during the fourth quarter, which was down 17 percent in dollars and 14 percent in deals from the previous quarter, when VCs put $14 billion into 1,141 deals.

“The fund-raising environment [for venture capital firms] is still pretty strong,” Tom Ciccolella, a PwC partner who leads the firm’s U.S. venture capital practice, said in an interview. Nevertheless, “from what I’m seeing, a lot of folks are sitting on money.”

Because many venture-backed startups are raising bigger rounds, companies are staying private longer, Ciccolella explained, saying that “if you go to market and raise half a billion dollars, you don’t need to come back the next quarter for more money.”

Ciccolella’s comments were echoed by PitchBook founder and CEO John Gabbert, who said the venture capital markets are matching the shift to bigger deals.

PitchBook data shows that venture firm fund-raising hit a 10-year high in 2016, with 253 funds raising a total of $41.6 billion. PitchBook attributed the spike to an uptick in the number of billion-dollar funds, with seven firms raising $1 billion or more, including Andreessen Horowitz, Kleiner Perkins Caufield & Byers, and Greylock Partners.

In other highlights, the Venture Monitor report shows:

—First financings, defined as the first round of equity funding in a startup by an institutional venture investor, declined in 2016, with venture firms investing a total of $6.6 billion in just 2,340 companies. This represented a 30 percent decline in dollars from 2015, when first-round deals totaled $8.7 billion, and was the lowest count since 2010.

—Just over half of all venture deals in 2016 were angel or seed rounds; early stage deals accounted for 30.7 percent of the total number of financings, and late-stage deals amounted to 18.7 percent.

—About $33 billion was invested in software companies, and accounted for 48 percent of the total invested capital in 2016; $7.8 billion was invested in biotech and pharmaceutical companies, amounting to 11 percent of all venture investment.

—A slowdown in exit activity for venture-backed companies continued in the fourth quarter, and the Venture Monitor reported a total of 142 exits with an overall value of $6.8 billion. Of these, just 39 were IPOs, the fewest since 2009, when 10 venture-backed companies made their debut on U.S. exchanges. Looking forward, the Venture Monitor said there are 20 venture-backed companies registered to go public, including Snap, AppDynamics, and AppNexus.

The top 10 deals, according to Venture Monitor, are:

Opendoor$210 millionSan FranciscoSoftware
Payoneer$180 millionNew YorkFinancial Software
Stripe$150 millionSan FranciscoSoftware
Postmates$141 millionSan FranciscoSoftware
OfferUp$130 millionBellevue, WASoftware
Zymergen$130 millionEmeryville, CABusiness Products
Memebox$126 millionSan FranciscoRetail
Unity Biotechnology$116 millionSan FranciscoPharma/Biotech
JetSmarter$105 millionFt. LauderdaleSoftware
Zibby$103 millionNew YorkSoftware

Source: PitchBook

Bruce V. Bigelow was the editor of Xconomy San Diego from 2008 to 2018. Read more about his life and work here. Follow @bvbigelow

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