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ALDA & Associates International, Inc. Newsletter

July/August 2017

The State of the Venture Capital Industry in July 2017 by David H. Fater

Since the presidential election, the various economic indicators have been on a tear. Stock market values continue to hit record highs (despite many knowledgeable people’s belief that the foundation for these valuations are not there). The unemployment rate has dropped to almost record lows and some states have unemployment rates as low as 2.3%. However, there is much anxiety present in the average person’s mind. So, as we sit here in July 2017 without a fix for healthcare in sight or tax reform being actively pursued because of too many distractions, what is the state of the venture capital industry?

Early indications are that 2017 will be a healthy year for venture capital despite the fact that deal activity and value have started off slowly. In 2014 there were 10,565 deals with an aggregate value of $69 billion. In 2015, there were 10,482 deals with an aggregate value of $79 billion. This dropped in 2016 to 8,469 deals and an aggregate value of $71 billion. Through the first quarter of 2017, there have been 1,808 deals worth $1.7 billion. At this rate, the totals may approximate the levels seen in 2012 as to number of deals but the average value is up 83%.

In looking at the average deal size by stage, the values are fairly level with Angel rounds being at $1 million, Early stage investments are running around $5 million and late stage deals are averaging $10 million. The progression makes perfectly natural sense as the companies being invested in execute their business plans and grow to scale with the venture capital funding providing the fuel to keep the engines running. Angel and seed rounds have seen the steepest drop as more and more investors are wanting to see trailing revenue as a proof of concept as they adopt a more risk averse profile. This is further evidenced by a plateauing of early stage value. Further, despite the data reflecting a decline across all venture stages, it has been angel and seed rounds that have experienced the most significant percentage decline over the last couple of years, a trend that is the largest culprit driving total investment counts lower. This notion could manifest itself in headlines that speak to more stringent and rational VCs, yet we speculate that, in reality, Series A and Series B investors have likely remained close to home in terms of their investment profiles, but fewer companies that are currently angel and seed-backed can fit the mold of the companies they would fund.

This is not representative of a fundamental decline of venture funding of innovative startups, but rather a return to a more disciplined approach with a much more critical eye on investment opportunities. With venture-backed companies staying private longer and first-time financings continuing to decrease, venture investors are focusing more of their efforts on supporting existing portfolio companies. The pace of investments in the US entrepreneurial ecosystem downshifted again in the first quarter of 2017 even as dollars invested bumped up due to several outsized deals. As venture investors keep their foot off the gas, the industry is now in a leveling-off period with the normalization industry leaders forecasted in recent months coming to fruition. Nevertheless, given the increasing diversity of limited partners (“LPs” or investors into venture funds) and a deeper bench of LPs interested in this asset class, it is likely the industry will see a strong number of venture funds raising capital this year. At the end of last year, many eyes were on the venture-backed exit environment, as expectations were high for 2017. By many accounts, the first quarter was not as eventful as some expected. Only seven venture-backed initial public offerings (IPOs) were completed, raising a total of $4 billion. However, the first three months of the year brought headlines for some prominent venture-backed exits, notably the IPO of Snap and the acquisition of AppDynamics by Cisco (both of which rank in the top 10 largest exits of their respective types during the past decade).

The initial success of the Snap and Mulesoft IPOs—along with a healthy pipeline of venture-backed companies currently in IPO registration— brings some optimism for more venture-backed companies to follow suit. Furthermore, the changing dynamics in late-stage funding activity suggests more IPOs could be on the horizon. With late-stage funding widely available in 2015 and early 2016, this paused the IPO path for some companies. However, with such funding not as accessible in the current climate, these companies may increasingly look toward an exit when the time is right.

Perhaps the biggest headlines of the quarter, on a broader level, came with the arrival of a new president in the White House. Some of the policy decisions emanating from the White House have already caused ripple effects in the entrepreneurial ecosystem. In particular actions taken on immigration policy have been distracting to entrepreneurial activity. The longer visa process for foreign-born founders has put a strain on company growth and in some cases prevented foreign-born founders from securing funding due to visa status. Recent developments from the Trump Administration and uncertainty stemming from future unknowns remain an X-factor in both the short and medium-term for venture investors. However, venture capital is about the long game, and investors and startups remain focused on building the next generation of innovative companies to lead the American economy. They are just being very selective about which companies and which sectors to fund. 

 

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To explore ways in which we can provide assistance in obtaining venture funds, please contact David H. Fater at dfater@alda-associates.com or Richard M. Cohen at rcohen@alda-associates.com or (877) 845-4657. 

 

 

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