VC investment dollars on pace to surpass 2017 record year, inching closer to dot com era, PitchBook finds

Investment in 3,912 venture-backed companies reached $57.5 billion invested across 3,997 deals in the first half of 2018, according to the 2Q 2018 PitchBook-NVCA Venture Monitor. With six months remaining in 2018, the $57.5 billion invested by venture capital (VC) firms already exceeds the full-year total for six of the past 10 years. If the current pace of dollars invested continues, 2018 will surpass 2017 as the highest amount of capital deployed by VCs in a year since the dot com era (early 2000s). Q1 and Q2 of 2018 also report as the highest quarters for VC dollars invested since the start of 2011.

While investments in late-stage companies and unicorns remain a strong driver of the thriving VC market, PitchBook researchers report that deal sizes increased across all stages. Through the first half of 2018, VC-backed unicorns have attracted more than $11.8 billion in investments – more than 20 percent of total VC financing. On the other end of the capital continuum, the median deal size for angel/seed stage deals has increased from $1 million in 2017 to $1.4 million through the first half of 2018, which puts it on pace to creep back towards 2015’s records highs after two years of decline.

In addition to increased round sizes from VCs in early-stage deals, PitchBook researchers report that an increase in the median age of startups was the driver for the larger median deal size. In 2018, the median age of a company in the angel/seed stage rose to 3.11 years, up from 2.4 years in 2017. In comparison, in 2008, the median age of a company receiving an angel/seed stage deal was less than 2 years old. The trend of older startups entering the VC lifecycle also has impacts on other series investments. The median age of a company receiving series A increased from approximately 2 years old in 2008 to 3.9 years old in 2018. For Series B companies, the median age increased from less than 4 years in 2008 to 5.2 years old in 2018.

While dollars invested continues to grow, PitchBook’s findings highlight the likely continuation of a decline in the total number of deals made — a trend that started in 2016. In addition to a decline in total number of deals, the number of angel/seed and early stage VC deals have also been on a gradual decline over the past two years. In comparison, late stage VC deals has been on a slight increase.

While 2016 was marked by concerns of too much ‘dry powder’ due to a limited number of exits and significant fund raising by VCs, 2018 looks to rebound with both fund count and capital raised in 2018 on pace to surpass 2017 totals and inch closer to 2016 fundraisings numbers. The uptick in fundraisings can be credited in part due to overall belief in the market and several significant IPOs over the last few quarters.

The report highlights one potential driver that will help maintain a thriving market, especially driving the increase in early stage and Series D median deal values — a rush of nontraditional VCs into the innovation economy. Over 60 percent of US Series D+ deals include nontraditional VCs including family offices, sovereign wealth funds, and mutual funds. These nontraditional VCs also are moving to early stage deals due to rising valuations and increased sophistication.

In addition to nontraditional VCs, PitchBook highlights that a rebounding IPO market also will keep this thriving VC market barreling forward through the rest of the year. While M&A activity has declined slightly, 2Q 2018 was the fifth consecutive quarter with 10 or more venture-backed IPOs. They also report that 12 of past 13 quarters have realized over $10 billion in exit value. Pharma and biotech IPO activity continues to make up the majority of the IPO market.

PitchBook researchers contend that a strong IPO market may strengthen the declining M&A market because corporate acquirers may feel more pressure to acquire a company before it goes public. The report also proposes that there could be a short-term uptick in the number of corporate acquisitions due to the recent tax bill.

The first half of 2018 saw the continuation of several other trends, including:

• Early-stage investing continues to climb higher, recording a seventh straight quarterly increase in capital invested;
• Median fund size continues to increase, reaching a 10-year high of $65 million;
• Fund sizes are trending larger with over 50 percent of funds having at least $50 million dollars raised;
• Since 2016, buyouts have been on a rapid increase with the median buy reaching $162 million — up from approximately $40 million in 2015; and,
• Corporate VC participation in venture deals has continued at a brisk pace in 2Q, with total deal value topping $13.5 billion.