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$77.3B in Total Venture Capital Invested in 2015, Report Finds; VC Trends to Look for in 2016

January 15, 2016

Even though the total amount invested by venture capitalists (VCs) grew for the fourth straight year to nearly $77.3 invested, Pitchbook analysts contend that 2014/2015 was the peak of the VC industry for the foreseeable future. While high valuations drove up the total amount invested, the number of deals plummeted during the second half of 2015 according to new data from Pitchbook.  In addition to insights from Pitchbook, other analysts contend that the declining trends of 2015 should remain through 2016.

U.S. VCs invested approximately $77.3 billion and closed nearly 8,100 rounds of investment in 2015, according to the 2015 Annual U.S. Venture Industry Report from PitchBook. While this marks the second straight year of strong VC numbers, a combined $145.3 billion invested in 2014 and 2015, Pitchbook researchers contend that VC financing peaked sometime in 2014 or early 2015. The second half of 2015, however, started a decline that may last well into 2016 and potentially beyond. While the peak was driven by a tide of massive unicorn-birthing rounds and relentless upward march of valuations, the decline in VC activity was a manifestation of investor concerns about the high valuations, concerns about Asian growth prospects, and other market factors.  The authors conclude that 2016 is shaping up to be quite different than 2014 and 2015.

Another trend reported by Pitchbook was a sudden decline in early stage activity by angel/seed investors and early stage VC from 2014 to 2015. During its peak in 2014, there were nearly 3,300 first-time financing rounds closed. However, in 2015, the number of first-time financing rounds closed dropped to 2,402. Pitchbook researchers contend that they were driven by very high early stage valuations (a record proportion of angel/seed investments were $5 million or more in size in 2015), and a shift made by several angel investors and VC firms to larger, later stage deals. In three major VC markets (the Bay Area, Pacific Northwest, and New York City), the median pre-money valuations for all deals were $32.5 million in the Bay Area, $24.1 million in the Pacific Northwest, and $25.1 million in New York City.

In another recent study, the National Venture Capital Association (NVCA) found that Venture capital firms raised less money and closed fewer U.S. funds in 2015. Similar to the finding of Pitchbook, while total money invested increased, NVCA reported that number of investments declined. The report also found that the number of new, first-time VC funds declined from over 260 new firms created in 2014 to less than 240 new firms created in 2015.

Echoing the U.S. venture capital industry, the global VC industry remained strong for the third consecutive year according to new data from Preqin. Driven by North America, VC invested $136 billion across 9,202 closed rounds. Similar to the U.S. the global market also saw a 6 percent drop from the 9,811 deals concluded in 2014, but a 45 percent increase on the $94 billion aggregate value recorded that year. The global markets also saw an increase in valuation as average deal size rose to $18 million in 2015 from $12 million in 2014.

Preqin researchers also found that most venture capital deals occur earlier in a company’s lifecycle, with 33 percent completed at the angel/seed stage and 26 percent at Series A. While North American and European deal activity declined, Asia reported a strong VC market with China recording 1,605 deals and India 927.

In 2015,   drone-tech emerged as one of the hottest industries for investment in 2015. After drone companies received only $94.4 million in VC financing in 2014, the drone-tech industry reached new heights by raising over $855.3 million in funding according to industry tracker Dow Jones VentureSource. Unlike the rest of the VC industry, analysts predict that VC interest in drone-tech should remain strong in 2016 and beyond.

Looking forward to 2016 and beyond, analysts are already raising concerns that the industry has peaked and will continue to decline seen in the second half of 2015 for the foreseeable future.  In fact, one analyst contends that the VC industry may be nearing a bubble. Using preliminary data from CB Insights, Galen Moore contends with fewer new unicorns and mega-deals plummeting toward the end of 2015 that we are nearing Q1 levels and potentially a bubble.

The final trend moving forward may be a multitrack financing model that focuses on raising enormous amounts of capital from private investors instead of going public. Based on a report by Ernst & Young analyzing the Q4 IPO, Noah Kulwin contends that while the global IPO market remains healthy and will continue in 2016, tech companies will continue to raise multiple rounds of financing from private investors. This strategy allows entrepreneurs to remain in control of the company while maintaining attractive financial protections from a smaller group of investors than public companies are afforded.

capital, venture capital