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Total VC dollars invested in 2017 on track to reach decade high

Investment into venture-backed companies in 2017 is on track to match or exceed dollars deployed in 2016, and if this pace holds, full-year 2017 venture capital (VC) dollars invested could be the highest in the past decade, according to the Q3 2017 PitchBook-NVCA Venture Monitor.

Venture investors deployed USD21.5 billion to more than 1,699 venture-backed companies during the third quarter, bringing 2017’s total investment to USD61.4 billion deployed across 5,948 deals to date. Mega-deals completed in the third quarter, like WeWork’s USD3 billion infusion of VC, helped inflate deal value and have become the new normal in VC where investors pump larger amounts of capital into fewer companies, especially in the later stages. In fact, deals that carried a valuation of USD1 billion or more represented less than 1 per cent of 2017 deal count, but nearly 22 per cent of the aggregate deal value. Meanwhile, private equity firms are increasingly providing an alternative liquidity option for a tepid exit market, which is pacing for the lowest number of exits since 2010.
“We are witnessing an upward trend in the amount of capital deployed while the number of companies receiving investment continues to shrink.  However, if you peel back the onion, you uncover the influence unicorns are having on market dynamics, with investments by non-traditional investors into these companies inflating the overall dollars invested and valuations,” says Bobby Franklin (pictured), President and CEO of NVCA. “The trends of fewer companies receiving investment and the concentration of dollars into unicorns and later-stage rounds signal a new normal for the venture industry.  Sitting on record-levels of dry powder, venture investors will continue to deploy capital into innovative companies, albeit at a likely slower pace.”
In Q3 2017, aggregate deal value increased 40 per cent from Q3 2016, which comes as no surprise given the number of large, late-stage deals and USD93 billion in available VC dry powder. Across all of 2017 to-date, late-stage deals have accounted for more than 20 per cent of total deal count for the first time since 2012, while angel and seed investments have fallen below the 50 per cent mark of completed financings for the first time in the same period. This activity highlights an underlying trend seen throughout 2017, with late-stage companies receiving more attention from investors and requiring larger rounds of financing; the amount of capital from deals USD25 million or more is the highest tracked, at almost 65 per cent of total capital invested. Unicorns like WeWork, Uber and Airbnb, are examples of this trend, as they’ve continued to raise record levels of capital, further boosting their valuations and delaying exits. For example, compared to 2016, there has been an 80 per cent increase in median valuations for Series D+ investments.
With venture-backed companies pushing out their exit timelines, partly due to a larger pool of private funding available, the total number and value of exits has fallen significantly. So far in 2017, there were 530 venture-backed exits, on track for 707 exits for full-year 2017, compared to 839 total exits in all of 2016. While exit value has been somewhat buoyed by a handful of recent unicorn exits, 2017 exit value is also pacing to be the lowest since 2013. A closer look at exit types shows IPOs have dropped considerably, from 19 in Q2 to just 8 in Q3, including Redfin, Kala Pharmaceuticals and Sienna Biopharmaceuticals. Interestingly, as the number of IPOs have decreased, private equity (PE) firms have stepped in at an increasing pace to purchase venture-backed companies. In fact, 2017 has seen the highest exit value from PE buyout transactions that PitchBook has ever recorded, at USD5.22 billion or just over 18 per cent of 2017 exits. Acquisitions have also slowed – just 112 corporate acquisitions were completed in Q3, down from 166 in Q2 2016.
Following several quarters of strong fundraising, Q3 activity declined considerably with just USD5.3 billion raised across 34 funds, a marked decrease compared to USD10.9 billion raised across 60 funds in Q2 2017. On an annual basis, USD24.4 billion has been raised so far in 2017, a slightly slower pace than 2016, which raised a total of USD40.4 billion. While the slowdown seems significant, it’s worth noting 963 funds have been raised since 2014, a large total on a historical basis. Additionally, general partners (GP) have adapted to the industry trend of larger deal sizes and valuations by raising larger funds and fewer follow-on micro VC funds. Median fund sizes in 2017 are 87 per cent higher than funds raised in 2015. At this current pace, 2017 may still become the fourth consecutive year with more than USD30 billion in fund commitments.
“Venture Capital activity remains healthy, following the cyclical nature of fundraising and capitalising on promising investment opportunities for fund managers. Valuations have remained high as certain tech industries mature and investors benefit from more information on industry dynamics,” says John Gabbert, CEO of PitchBook. “On the exit side, one of the more fascinating trends is the rise of non-traditional exits. We’ve seen a noteworthy uptick in PE buyouts as well as the formation of a special purpose acquisition company launched by Social Capital and Hedosophia with the common goal of purchasing a unicorn tech company. Fund managers will have interesting routes to create liquidity and return funds to investors moving forward.”

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