VC capital 2016 review, 2017 outlook

After a down year for both the number of venture capital (VC) deals and the total dollars invested in U.S.-based startups, analysts remain split on whether 2017 will be a continuation of the downward trend or a rebound year. Those bullish on the market point toward strong fundraising totals in 2015-2016 and a likely uptick in the number of initial public offering (IPO) market. Whereas, those bearish on the VC market are concerned about a congested industry.

2016 by the Numbers

PitchBook reports that VC firms invested just $68.3 billion via 7,966 deals with U.S-based startups in 2016 – a nearly 14 percent decrease from the previous year’s record high of $79.2 billion. This significant decline in VC activity returns total capital invested to levels comparable with 2014, while deal count will likely be at its lowest point since 2012.

In PitchBook’s 2016 Year in Review, the authors highlight another concerning trend for the VC industry and VC-backed startups. While VC investment saw a sharp decline, the number of VC-backed exits saw an even more precipitous decline of nearly 25 percent from 935 exits in 2015 to just 719 in 2016.

In positive news for the industry, VC fund raising remained strong with nearly $40.5 billion raised during 2016 – a 16 percent increase over 2015 and a record high for VC fundraising, according to the PitchBook platform. The majority of the new funds raised were by mega-funds that are intended to make large, later-stage investments in unicorns and other companies near large exits via merger/acquisition (M&A) or IPO.

Will IPOs Cause Rebound?

While Pitchbook’s data may indicate a continued downward trend for 2017, many venture capitalists and other analysts are bullish on 2017 – driven mostly by a rebound in the IPO market. In their 2017 Tech IPO Pipeline, CB Insight analysts contend that, while 2016 did not see a significant number of IPOs and other exits, several factors will lead startups to IPOs including:

• Continued maturation of companies in the pipeline;
• Increased calls by investors for companies to go public; and,
• A slowing down of deep pocketed investors (e.g., mutual funds and hedge funds) financing late-stage startups.

They also point toward a second-half rebound in the number of IPOs (10 total IPOs in Q3/Q4 of 2016 to only four in Q1/Q2) as evidence of a potential uptick in the number of IPOs in 2017.

In addition to a rebound in the IPO market, Matt Murphy, a managing director of Menlo Ventures, contends that there are other building blocks in place for a better 2017, according to an article from TechCrunch. Murphy writes that there could be an increase in the market because many VC firms are well capitalized (due to strong fundraising in 2015/16) and more reasonable valuations – only 12 companies received unicorn valuation as compared to 40 in 2015. He also predicts that smaller, early stage startups will benefit because many VC firms’ “obsession of funding unicorns at almost any price has materially waned.”

Will 2017 be a Continuation of 2016?

In PitchBook’s 2016 Year in Review, analysts raise concerns about the VC industry becoming congested, thus leading to another decline in both number of deals and dollars invested. In contrast to those bullish on the VC market, PitchBook indicates that there isn’t clear evidence that there will be an uptick in the number of IPOs/exits and that the fundraising will not actualize into good deals. Other concerns raised by PitchBook analysts as they look toward 2017 include:

• Will fundraising efforts be subdued due to the challenging deal environment?
• Are the tech companies in the IPO pipeline worthy of IPO?
• Will Fortune 500 companies (especially in healthcare) continue to target young startups for M&A in an attempt to “buy innovation” that both augments and/or grows their current strategies?

Unlike 2016 when most analysts predicted a sharp decline from a record-setting 2015, the VC capital industry in 2017 is fraught with uncertainty due to different interpretation of the 2016 data/trends. Will the VC bears or bulls be right in 2017?