Once considered a passing phase, the concentration of capital into fewer, larger venture capital deals appears to be the new normal. Fueled by so-called mega-funds, investment in U.S.-based venture-backed companies as of the end of the third quarter hit a decade high, and is on pace to pass the $100 billion mark by year’s end.
In the third quarter VC investments totaled nearly $28 billion, bringing the year’s total as of Sept. 30 to more than $84 billion, according to the latest quarterly Venture Monitor report, which is produced by the National Venture Capital Association (NVCA) and PitchBook. That’s more than in the entirety of 2017, when $82 billion was invested.
“The first three quarters of 2018 show that the investment environment for venture-backed companies is the strongest it has been in well over a decade,” said NVCA president and CEO Bobby Franklin in a prepared statement.
As the number of deals dropped below 2,000 for the first time since the fourth quarter of 2012, the number of mega-rounds—deals of at least $100 million—rose about 39 percent year over year, and made up about 37 percent of total VC invested in the past quarter, according to Venture Monitor. Nearly a quarter of the money invested in the third quarter went to later-stage VC deals—the highest percentage since 2011, the data show.
In total the Venture Monitor identified 1,937 deals, collectively representing $27.86 billion in investment in the third quarter.
PwC and CB Insights’ quarterly MoneyTree report, a rival publication, reported 1,229 investments totaling about $27.54 billion—more money than it has tracked in any quarter since 2000, at the peak of the dot-com era. (The reports’ findings don’t match up exactly because the organizations that produce the publications use different methodologies to track deals.)
Among the quarter’s largest deals were three rounds raised by New York-based companies—$1 billion by co-working giant WeWork, $550 million by trendy stationary spin bike company Peloton, and $500 million by Letgo, an online marketplace. Seven companies in California rounded out the quarter’s top 10 list, according to MoneyTree, including Newark, CA-based electric car maker Lucid Motors and Uber, the ride-hailing behemoth headquartered in San Francisco (see top 10 deal list below).
While news of more big deals may be music to the startup community’s ears—at least those who are running later-stage companies—PitchBook founder and CEO John Gabbert advised some caution.
“There is a question of whether greater competition among investors and the general capital availability is a good thing—as investors may run the risk of overlooking company fundamentals and inflating valuations,” said Gabbert, in a prepared statement. “At the same time, the exit market appears exceptionally healthy so far this year, especially through its support of large exits at or above their last private valuation.”
There were 8 percent fewer exits of VC-backed companies than in the third quarter of 2017, but those exits’ collective value—$20.9 billion across 182 deals—puts the industry on pace to surpass the annual value of such exits dating back to 2014, according to Venture Monitor data. (Exit value spiked in 2014 as a result of Facebook’s $22 billion acquisition of messaging service WhatsApp.) While acquisitions remain the top avenue for exits, the IPO window for both tech and life sciences companies has been welcoming this year. As of the end of the the third quarter there had already been more venture-backed IPOs in 2018 than in 2016 or in 2017 (full years), the Venture Monitor report said. Buyouts have also provided some additional liquidity.
While early-stage startups may be feeling the pinch as more funding is funneled to later-stage companies, PwC partner Tom Ciccolella, who leads the firm’s U.S. venture capital practice, said the number of deals “still reflects a healthy startup ecosystem.”
It’s an ecosystem that VCs expect will continue to make them and their limited partners money going forward, if the venture funds raised in the third quarter are any indication.
Both the number of funds and size of funds raising venture capital were higher as of the end of the third quarter compared to last year, and VCs have already raised more than $30 billion in commitments for the fifth year running, according to Venture Monitor. That total was bolstered by five funds of $1 billion or more that have closed this year. That’s already more than in 2017, which saw three such funds close.
Here are the top 10 funding deals of the third quarter, according to the MoneyTree report:
WeWork (New York): $1B
Lucid Motors (Newark, CA): $1B
Peloton (New York): $550M
Zoox (Menlo Park, CA): $500M
Letgo (New York): $500M
Uber (San Francisco): $500M
Samumed (San Diego, CA): $438M
Slack Technologies (San Francisco): $427M
AppLovin (San Francisco): $400M
OpenDoor Labs (San Francisco): $400M