Capital Stockpile Grows as Venture Fund-Raising Hits Recent High

In the venture capital business, a rising tide lifts all boats.

That’s the idea, at least. A new report released today by Seattle-based PitchBook shows that U.S. venture firms have plenty of capital to invest in new companies, after 328 venture funds raised a total of $51.6 billion in 2016.

That’s a high-water mark for VC fund-raising in the post dot-com era. The report shows, however, that venture firms also were more selective about their investment deals in 2016. Deal sizes have been getting bigger, companies are staying private longer, and VCs are looking for greater traction and growth benchmarks throughout the venture lifecycle, the report said.

The $51.6 billion that VCs raised last year was 14 percent higher than 2015, when the same number of venture funds raised $44.9 billion from pension funds, endowments, and other investors, according to PitchBook data. It also was higher than 2008, when 344 funds raised $47.5 billion.

American private equity firms, which generally take a majority stake in more mature, later-stage companies, raised a $268.5 billion in 2016, according to PitchBook. The financial data specialist said it was the fourth consecutive year that annual fund-raising by PE firms topped $260 billion.

Some other highlights from the PitchBook report:

—Average venture fund size grew to $163 million in 2016. More funds closed with over $100 million in commitments than any year in the past decade, including 28 funds larger than $500 million, also a decade high.

— The number of micro funds (funds that closed with less than $50 million) fell to a 10-year low of 118 in 2016, ending the year with just $1.5 billion in total commitments. That represents just 3 percent of venture commitments throughout 2016 and the smallest amount micro funds have raised in a decade.

—Strong VC fund-raising over the past several years, as well as a slowdown in venture investments in 2016, has resulted in a buildup of venture capital reserves, with a total of $121.4 billion in “dry powder” available for additional investments—the most in a decade.

—The combined effects of increased fund-raising, bigger funds making fewer investments, and a buildup of reserve capital is expected to result in a slowdown in fund-raising, “an outcome we view as healthy given the current state of the market,” the PitchBook report said.

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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