venture capital

With the 2017 data in the books (see our analysis of MoneyTree and useful stats from the Venture Monitor), we can take a more informed look at the prospects for the industry in 2018. We identify four trends — increasing exits, massive deals, accumulating capital and improved diversity — that may shape the overall VC industry in 2018 and why they could make a difference for regional innovation initiatives.

Over the ten-year period from 2007 to 2017, as total venture capital investments more than doubled, growing from $41.2 billion to 84.0 billion, the number of deals increased by just 2.7 percent according to new data from the NVCA-Pitchbook Venture Capital Monitor. In 2017, more than half of all venture capital deals and three-quarters of all venture capital dollars went to companies in California, New York, and Massachusetts in 2017. However, the share of deals going to these three states decreased slightly from 2007 to 2017 (from 56.1 to 52.4 percent), while the share of dollars increased from 62.3 percent to 75.7 percent. 

In this first part of a two-part series, SSTI will look at the common themes and trends of 2017 that were highlighted in the 2017 MoneyTree Report. In part two, SSTI will provide insights on some potential new trends observed last year that may continue to affect the investment of venture capital in 2018.

The U.S. venture capital industry’s annual funding topped $70 billion in 2017 for the second time ever, according to PricewaterhouseCoopers (PWC) and CB Insights' 2017 MoneyTree Report. The $71.9 billion invested marked a 6.8 percent increase from 2016 — the record high-water mark of $76.8 billion was achieved in 2015.  

Venture-backed startups generate nine times the knowledge spillovers (e.g., patenting activity and citations) when compared to that produced by R&D investment of established companies, according to recent research. In Measuring the Spillovers of Venture Capital, researchers from the University of Munich found that, on average, two-thirds of this increase can be traced to more patenting by other companies within the VC-backed company’s spillover pool (e.g., companies with geographic or industry proximity). The companies that most benefited from the knowledge spillover were large, established companies.

Through the third quarter of 2017, the venture capital market saw an average deal that invested more money into larger and older companies than in prior years. With fewer exits and deals occurring throughout the industry — as well as a historic $90+ billion in uninvested capital (aka “dry powder”) — a reasonable expectation might be that funds would have a difficult time raising capital. In fact, fund raising, while likely to finish behind 2016, is set for another straight year with greater than $30 billion raised, and this money is going into more funds with an overall increasing fund size.

Bloomberg’s U.S. Startups Barometer for August 21, 2017 highlights an environment ripe for startups to attract venture capital (VC). The weekly index tracks the overall health of the business environment for private technology companies based in the U.S. Driven by the number of VC financing deals, the barometer set a new record high for the second consecutive week with a nearly 65 percent increase from last year’s index score.

The U.S. Department of Treasury released its final annual report for the State Small Business Credit Initiative (SSBCI), which provided funding to states for lending and investment programs. “Venture capital” programs, often structured for pre-seed (13 percent of funds), seed (27 percent) or early stage (45 percent) investments, attracted $4.2 billion in immediate private financing against $327 million in federal dollars. This leverage of $12.76 of private investment for every public dollar was further improved by more than $2 billion in subsequent private financing to date. Perhaps more significant than the program’s ability to attract private investors has been its success in generating investments outside of the nation’s most concentrated markets.

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.