Beyond Unicorns: First Six Months of 2016 Raise Concerns About Availability of VC Funding

At the end of 2015, there were concerns that the Venture Capital (VC) industry had peaked and there would be a quick return to 2013 VC investment levels. While there is still six months for the VC markets to see a more rapid slow down, Q1 and Q2 VC numbers indicate that there has only been a slight slowdown in the VC markets. However, a troubling trend from 2014 continues to dominate the VC industry – the strong VC market is driven by investment in mature, late-stage companies – either full-fledged unicorns or their slightly lower-valued counterparts. While unicorns are attracting eye-popping rounds of funding, smaller, younger startups are struggling to attract VC-backing, according to a recent report from PitchBook. In many cases, unicorns are pushing off IPOs due to the substantial rounds of funding that they receive.

In PitchBook’s U.S. Venture Industry Report: 2Q 2016, the authors found that VCs invested $22.3 billion across 1,906 deals in the second quarter of the year. Of that $22.3 billion invested, a record 40 percent of investment ($8.8 billion) went to unicorns – more than double the $4.1 billion (20 percent) during Q2 of 2015.

The trend toward unicorns started in 2014 and has remained a driving force in the industry. Since 2014, unicorns and other late-stage companies have been responsible for much of the surge in VC invested with over 66 percent of all VC invested coming from investment rounds of $25 million or more. Tech giants – Uber, Snapchat, etc. – have been among the private VC-backed companies that eschewed IPOs or were not acquired by larger firms.

PitchBook also reports that that while the total capital invested increased by 11 percent, the total number of deals plummeted by 29 percent. In the first six months of 2016, VCs invested $10 billion in late-stage companies. In 2015, VCs invested $11 billion in late-stage companies.

While VCs remain cautious, PitchBook reports that VCs worldwide were able to raise $18.7 billion in funding across 101 funds during Q2 – up 15 percent from Q2 of 2015. This record-setting quarter follows a strong fundraising Q1, when VCs raised $16.3 billion in capital.

PitchBook researchers conclude that the large ($25 million or more) rounds of funding can be attributed to the significant fundraising efforts creating an abundance of capital combined with a lack of viable funding alternatives that address the general cautious nature of current VCs. In their search for companies with proven business models, they are continually returning to the same select group of unicorns/near-unicorns to the detriment of younger, less-proven startups.