VCs Throwing Caution to the Wind? VCs Invest $12.1B in Q1 of 2016

Coming off a record setting year, industry analysts contended that there would be a more cautious U.S. venture capital industry (VC) in 2016 with discussion of a VC bubble. However, in Q1 of 2016, venture capitalists invested more than $10 billion for the ninth consecutive quarter with little concern over a bubble. In total, VCs invested $12.1 billion in 969 deals in the Q1 of 2016, according to the MoneyTree Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA). At the same time, U.S. venture capital firms raised $12.0 billion for 57 funds during Q1 of 2016, making it the strongest quarter for funds raised since Q2 of 2006, according to the Fundraising Report by Thomson Reuters and NVCA. A review of the data indicates continuation of trends in where venture capital is being invested, the decline of investment in seed stage companies, and increasing corporate venture capital activity with 20.6 percent of funds invested in Q1 of 2016 coming from corporate venture capital.

Concentration of dollars invested

In the face of criticism for the “relentless pursuit of unicorns,” the top 10 deals of Q1 accounted for 25 percent of total dollars invested in the first quarter, up from 18 percent of total venture capital deployed during Q4 of 2015. While VCs continued to concentrate their investment in a handful of startups, the industry showed a willingness to maintain a more diverse portfolio of investments.

Software, however, continues to receive the highest level of funding of all industries, receiving $5.1 billion going into 376 deals for the quarter. PwC reports that half of the top 10 megadeals (investments of $100m or more) were in the software industry. The biotechnology industry also remained strong in Q1 of 2016  with $1.8 billion going into 118 deals, representing an 11 percent increase in dollars and a 19 percent increase in deals, compared with the previous quarter.

Stage of investment

The VC industry continues to pullout of seed stage investments with dollars invested in seed stage companies declining 10 percent during Q1. In total, VCs made 62 deals totaling $418 million – 3 percent of all venture investment dollars for the quarter and 6 percent of all deals. In comparison, investments in later stage companies increased 10 percent to $3.5 billion going into 213 deals in Q1.

The report also found that VCs were more tepid with regards to first-time financing (companies receiving venture capital for the first time). Companies receiving first-time financing received only $1.7 billion – a decrease of 31 percent from Q4 of 2015.

Geographic Distribution

The big three regions – Silicon Valley, New England, and the New York Metro – remained magnets for VC dollars with over $7.4 billion being invested into those three regions. The southeast, driven by a megadeal in Florida, nearly doubled its level of VC funding from $563 million in Q4 of 2015 to $1.1 billion in Q1 of 2016.

As with dollars invested, Q1 saw a concertation in the number of active venture capital firms with 13 of the most active VC firms being located in the Silicon Valley region. While the region only attracted $174 million in Q1 of 2016, the Philadelphia area was home to two of the five most active VC Firms – First Round Capital and DreamIt Ventures. Those firms closed on 17 and 14 deals respectively.

A breakout by state of venture capital invested can be found here.

Funds Raised

NVCA reports that U.S. VC firms raised $12 billion for 57 funds during the Q1 of 2016 – a 59 percent increase by dollar commitments from the first quarter of 2015 and a 17 percent decrease in number of funds raised.  This makes Q1 of 2016 the strongest quarter for dollar raised in almost a decade – in Q2 of 2006, VCs raised $14.3 billion for 79 funds.

Corporate Venture Activity

In Q1 of 2016, corporate VC groups deployed over $2.5 billion in 228 deals to the entrepreneurial ecosystem in the first quarter of 2016 – corporate VC made up 23.5 percent of all venture capital deals and 20.6 percent of venture capital invested during the first three months of the year. This marks the ninth straight quarter that the percentage of deals with corporate venture participation has risen. The 23.5 percent of all venture capital deals is the highest since level since Q3 of 2008 when corporate venture groups were involved in 24.1 percent of deals.

Similar to the general VC market, the authors find companies continue to be the beneficiaries of increased corporate venture activity, receiving $1.2 billion in 92 deals, representing 50 percent of corporate venture dollars deployed and over 40 percent of deals.  Once again, Biotechnology companies received the second largest amount of corporate venture dollars in the first quarter, attracting $320 million in 32 deals.

Corporate VC, however, bucks the general trend of the industry by focusing much more heavily on seed stage investments.  Corporate VCs deployed $89.2 million to seed stage companies through 14 deals.  This represents 3.6 percent of all corporate venture dollars invested and 6.1 percent of all deals involving corporate venture investors.  VCs also invested heavily in early stage investments with $977.2 million invested in 102 deals.

Download the corporate VC data…