Investment into venture-backed companies is already on pace to experience another record-breaking year in 2018, according to the PitchBook-NVCA Venture Monitor, a quarterly report on venture capital activity jointly produced by PitchBook and the National Venture Capital Association (NVCA).
Coming off multiple years of record fundraising, just over USD8 billion was raised by venture funds in Q1 2018, a slight decline from previous quarters. Despite the slow start, several billion-dollar mega-funds have since been announced, which are expected to boost fund size and capital raised as 2018 unfolds. The sustained momentum in venture fundraising has continued to fuel ramped dealmaking. Investors deployed the highest amount of capital in Q1 2018 than any single quarter since 2006 (USD28.2 billion), with unicorns attracting over 21 per cent of total VC capital. The exit market for venture-backed companies remained sluggish in the first quarter; however, several landmark deals helped drive exit value, including Amazon’s USD1.2 billion acquisition of Ring and Dropbox’s USD756 million public debut. The momentum generated from these exits has created optimism for a stronger exit market in 2018.
“The first quarter of 2018 picked up right where 2017 left off, with the largest amount of capital deployed into venture-backed companies in a single quarter since 2006, marking a very strong start to venture investment this year,” says Bobby Franklin, President and CEO of NVCA. “As we look ahead to the rest of the year, Q1 appears to be indicating a strengthening exit environment, which would bring liquidity to LPs and could lead to an uptick in fundraising, and in turn lead to even higher levels of investment activity. All of which means that venture investors are well-poised in 2018 to continue investing in and supporting the growth of young, innovative companies that strengthen the US economy.”
“While median time to exit has certainly increased, we’ve noticed VCs have distributed capital back to LPs at a record pace, which is reflective in the larger exits that have come to market,” says John Gabbert, founder and CEO of PitchBook. “The venture industry is poised to continue its healthy pace of dealmaking, especially when combined with the increased participation of non-traditional investors and the boost in pre-seed capital. The IPO market is particularly intriguing with several mature, cash efficient businesses gearing up for a public debut. We expect these players will be well received in the public markets.”
Fundraising Activity – By quarter’s end, venture fundraising paced below 2017 levels with USD7.9 billion committed across 54 vehicles. The dip can be traced back to the continued demand for micro-funds (vehicles smaller than USD50 million) with niche strategies or regional focuses, which made up half of the total number of funds closed in the first quarter. This emphasis on micro-funds caused a decline in median fund size – down from USD50 million in 2017 to USD38 million in the first quarter of 2018. Despite the overall decline in capital raised and fund count, fundraising is expected to gain momentum in 2018 on the heels of several USD1 billion-plus funds closed in the first quarter and more in the pipeline. Vehicles over USD1 billion made up 36 per cent of total capital raised in Q1 2018 led by Norwest Venture Partners’ USD1.5 billion fund, General Catalyst Partners’ USD1.37 billion fund and Battery Ventures’ USD1.25 raised across two complementary vehicles. Khosla Ventures, Sequoia, Lightspeed Venture Partners, and Social Capital have all announced intentions to raise funds of USD1 billion or more in the coming months.
Investors hit the ground running in Q1 2018, deploying USD28.2 billion in venture-backed companies across 1,683 deals – the highest amount of capital deployed in a single quarter since 2006. At quarter’s end, there were 113 financings over USD50 million, representing 14 per cent of total deal value and the first quarter to surpass 100 financings over USD50 million. What’s more, the median deal size took the largest jump PitchBook has tracked. The average early stage deal was 65 per cent larger compared to 2017, while the average late-stage deal tracked 42 per cent higher than 2017’s year-end figure. Continued investment in unicorns (venture-backed companies valued at USD1 billion-plus) played a role in elevating late-stage deal sizes. In Q1 2018, 17 unicorns attracted a combined USD5.2 billion net new capital, accounting for 18 per cent all capital invested in the US last quarter. The larger deal sizes make sense due to the rise in median age of companies raising rounds at each stage – the median age of companies raising a seed/angel round has hit three years old and eight years for late stage rounds.

Larger deal sizes in late-stage VC have enabled companies to extend cash runways and decrease the sense of urgency to exit. Consequently, the exit market continued its sluggish run in Q1 2018, with USD8.1 billion in disclosed exit value across 188 reported deals – the lowest exit value and count since Q1 2013 and Q4 2011, respectively. In the first quarter of 2018, there were 144 venture-backed M&A transactions, down from 179 acquisitions the same time last year. Amazon’s USD1.2 billion acquisition of smart security device company, Ring, was the largest acquisition of the quarter. Additionally, there were 15 venture-backed IPOs in Q1 2018, led by storage platform Dropbox’s public debut, which raised USD756 million. Since Dropbox’s IPO, several unicorns have since filed for IPO including DocuSign and Pluralsight. Looking ahead, the strong IPO market, coupled with the new tax reform legislation, has fueled a growing sense of optimism for a strengthening exit market in 2018.
