31 Mega-rounds, strong fundraising drive VC industry in Q2 of 2017

As we enter the second half of 2017, the U.S. venture capital (VC) market is driven by several noticeable trends. After peaking in 2015, the current VC market continues its slow decline in the number of deals, but Q2 of 2017 saw a spike in mega-rounds – rounds of $100 million or more. These mega-rounds are accompanied by strong fundraising efforts including a record-setting mega fund launch.

While the number of VC deals in the U.S. continued to decline, the total dollars invested increased and nearly matched Q2 of 2016 due to several mega-rounds. In Q2, the number of deals declined by nearly 4.5 percent from 1,206 in Q1 2017 to 1,152 in Q2 according to PricewaterhouseCoopers (PwC)/CB Insights’ Moneytree Report for Q2 2017.  However, the total dollars invested increased from $14.4 billion in Q1, 2017 to $18.4 billion in Q2 – an increase of nearly 28 percent.

PwC’s Tom Ciccolella highlights in their report: “Q2 was a tale of two trends. U.S. deal activity continued its multi-quarter downward trend, but the growth rate of investments in dollar terms accelerated from the first quarter. A surge in mega-round deals, to the second highest level seen to date, helped drive a robust level of quarterly VC funding.” 

In Q2 2017, PwC reported 31 mega-rounds – the highest in the U.S. since the peak of 36 in Q3 2015. The focus on mega-rounds (deals of $100 million or more) also is highlighted by a stronger quarter for late stage companies with median later-stage deal size hitting its highest point since Q3 2015. Bouncing back from the eight-quarter low of Q1 2017 of $21.5 million, the median late-stage deal was $33 million – an increase of over 53 percent. In addition to the strong quarter for late-stage companies, median later-stage deal size ($16 million) also jumped near record highs in Q2 2017.

These mega-rounds also are accompanied by increases in the number of unicorn births. In Q2 2017, PwC reports nine VC-backed companies received unicorn valuations ($1 billion or more), up from only three in Q1 2017. The nine unicorn births nearly match the total of 13 for all of 2016.

Is this renewed focus on mega-rounds due to increasing pressure to invest becaue of 2016’s record fundraising levels? While it is unclear, there are concerns that pressure from investors (especially institutional investors) may be driving some of these mega-rounds as VCs chase large ROIs. Analysts are worried that VCs are moving away from early stage investors to ensure reduced risk and quicker returns.

This is compounded by the fact that fundraising remains strong as well as becoming more centralized in several mega-funds. In NVCA-Pitchbook Venture Capital Monitor for Q2 2017, the authors highlight that the strong fundraising efforts from 2016 have continued in the first half of 2017 with New Enterprise Associates’ record-setting $3.3 billion fund. A total of 119 funds have already closed this year to date – raising a total of $19.14 billion.

However, KPMG researchers, in Venture Pulse Q2 2017, contend that these large capital reserves (or dry powder) held by VCs are transforming the industry. They argue that the strong fundraising “exemplifies how the venture industry still has more than enough funds to support a healthy rate of investing for some time, even in a relatively pricey climate.” They also contend that many investors are patient because of the perception of considerable opportunities remaining in key, emergent technologies.

Bobby Franklin, president and CEO of NVCA, relays similar sentiment. “With $130 billion in capital raised since 2014 and the IPO market for venture-backed companies strengthening, the dynamics of the industry are healthy and venture investors are in a strong position to support the growth of the next generation of innovative companies,” Franklin said.