Jul 10, 2018 | Techcelerate Ventures |
4 Q 2017 2017 sees more than $84B in VC invested, the highest tally since the dot-com era Pages 4-5 The definitive review of the US venture capital ecosystem covering 4Q and full-year 2017 Sector analysis, with spotlights by Silicon Valley Bank on biotech & fintech Pages 15-17 League tables for 4Q deals, investors, exits and more Pages 32-34 In partnership with Credits & Contact PitchBook Data, Inc. JOHN GABBERT Founder, CEO ADLEY BOWDEN Vice President, Research & Analysis Content NIZAR TARHUNI Analysis Manager KYLE STANFORD Analyst BRYAN HANSON Data Analyst II JENNIFER SAM Senior Graphic Designer RESEARCH email@example.com National Venture Capital Association (NVCA) BOBBY FRANKLIN President & CEO MARYAM HAQUE Vice President of Research & Strategic Engagement BEN VEGHTE Vice President of Communications & Marketing Contact NVCA nvca.org firstname.lastname@example.org Silicon Valley Bank GREG BECKER Chief Executive Officer MICHAEL DESCHENEAUX President DENNY BOYLE Managing Director, Fintech JONATHAN NORRIS Managing Director, Life Science & Healthcare DEREK RIDGLEY Credit Research & Development Officer Contact Silicon Valley Bank svb.com email@example.com Perkins Coie BUDDY ARNHEIM Partner, Emerging Companies & Venture Capital FIONA BROPHY Partner, Emerging Companies & Venture Capital LOWELL NESS Partner, Blockchain Technology & Digital Currency Contact Perkins Coie perkinscoie.com startuppercolator.com Solium KEVIN SWAN VP Corporate Development JEREMY WRIGHT Head of Private Markets STEVE LIU Head of Solium Analytics Contact Solium solium.com Executive summary 3 Overview 4-5 Perkins Coie: Cryptos, standardization & structured release valves 7-8 Angel/seed 9 First financings 10 Early-stage VC 11 Late-stage VC 12 Activity by region 13 Activity by sector 14 SVB: When tech meets biotech 15 SVB: US fintech investment grows in 2017: What’s next? 17 Corporate VC 18-19 Growth equity 21-22 Q&A: SVB President Michael Descheneaux 23 SVB: Credit Insights: Debt vs. equity 24 SVB: Startup Financial Insights 25 Exits 26-27 Fundraising 28-30 League Tables 32-34 Methodology 35 Contents 2 4Q 2017 PITCHBOOK-NVCA VENTURE MONITOR Executive Summary 3 4Q 2017 PITCHBOOK-NVCA VENTURE MONITOR The fourth quarter of 2017 bookended the year as the third consecutive quarter with more than $20 billion deployed into US venture- backed companies, and marked the close of a strong year of investment that surpassed $80 billion annually for the first time since the dot-com era. Investors deployed $23.75 billion into 1,772 companies in 4Q, the fewest since 4Q 2011, bringing the annual total to 7,783 and marking the lowest level since 2012. In unpacking the data and speaking with venture investors, the impact of the continued evolution of market dynamics were evident in 2017. After investors raised a total of $110 billion via venture funds from 2014 to 2016—and an additional $32.4 billion last year—capital ready for deployment into startups has been more than ample. Beyond traditional capital from venture capital funds, SoftBank’s headline- grabbing $100 billion Vision Fund has had an ever-increasing role in the ecosystem with no signs of abating. SoftBank was present in several of the highest-profile deals of the year, including WeWork’s $3 billion US investment and Compass’ $450 million rounds last quarter. Not to mention it is set to become the largest investor in Uber this year. While such a large pool of capital is available to the industry, investors are working to stay disciplined in their approach, translating into overall fewer deals taking place, though more capital being deployed at higher valuations. As a result, median deal sizes have increased across all stages in recent years, doubling at the angel, seed and early stages since 2013, while the median late-stage deal has grown about 67% over that period. At the same time, the age of companies receiving funding at each series has also seen a noticeable increase over the past five years. This is likely a cause and result of investors looking for stronger KPIs when investing such large checks. That is, the stronger the company, the worthier of that oversized deal they seemingly are. Coinciding with these market shifts, investment into unicorns (i.e., those valued at $1 billion+) occurred at a frenetic pace, reaching a record high in 2017. These companies attracted $19.1 billion last year, which represented 23% of the total capital invested across the industry. An important trend that flew more under the radar in 2017 was the rise in life science investment, which reached a 10-year high with $17.6 billion deployed to 1,046 companies working on groundbreaking innovations in healthcare. Part of the rise can be attributed to the renewed focus on biotech opportunities. Once seen as a niche investment strategy, biotech has moved in the direction of software, becoming somewhat mainstream in the venture world. In fact, cancer screening company Grail recorded the second-largest deal of the fourth quarter, raising $1.2 billion, and bioengineering startup Ginkgo Bioworks raised $275 million in 4Q and joined Grail to reach unicorn status. This trend is further supported by recent fundraising activity led by the arrival of new firms such as Pivotal bioVenture Partners, which raised a $300 million fund in 2017, as well as established firms such as Andreessen Horowitz, which recently closed its $450 million second biotech fund. Public policy developments have also had a positive impact on the biotech sector. Investors have welcomed the recent appointment of physician and former venture investor Scott Gottlieb as Commissioner of the Food and Drug Administration (FDA) and support his efforts to reform the FDA to better advance healthcare innovations. A change in leadership at the FDA hasn’t been the only example of public policy impacting the venture ecosystem. Many aspects of the recently-passed tax reform plan will touch entrepreneurs, startups and venture investors. Lowering the corporate tax rate to 21% as well as the repatriation provisions to allow corporations to bring back profits from overseas may signal increased M&A activity in the year ahead after activity stalled in 2017 with the fewest recorded (565) since 2009. The changes in tax reform bring good news for startups looking to take the next step in their growth, and VC investors seeking liquidity. While the overall US economy posted a strong 2017, optimism for a strengthening venture-backed IPO environment in 2017 yielded an uptick from 41 IPOs in 2016 to 58 in 2017, but the resurgent comeback many were looking for never fully materialized. With companies staying private longer and valuations peaking in the private market, the challenge remains for public market investors to gain early access to the new wave of high-growth companies in order to reap the full benefits. Capital market reform remains a focus for the venture industry, and some are perhaps more cautiously optimistic for an uptick in IPO activity in 2018. Many will be closely tracking Spotify’s efforts to directly list on the NYSE in hopes it could lead others to pursue the same track. 4 4Q 2017 PITCHBOOK-NVCA VENTURE MONITOR $36.9$26.6$31.6$44.0$41.2$45.3$69.5$79.3$72.4$84.24,684 4,434 5,351 6,703 7,849 9,183 10,406 10,463 8,635 8,076 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Deal Value ($B) # of Deals Closed 0 500 1,000 1,500 2,000 2,500 3,000 $0 $5 $10 $15 $20 $25 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Deal Value ($B) # of Deals Closed Angel/Seed Early VC Late VC Overview Midway through last year, we highlighted that 2017 was pacing to come in as the highest year since at least the dot-com era in terms of total capital invested. As we closed out 2017, this certainly played out, with more than $84 billion in capital invested across nearly 8,100 completed financings, reflecting a drop of around 6% in terms of aggregate deals, yet a surge in total deal value of 16% year over year (YoY). The venture markets today have undergone a shift in the dynamics and parameters that have shaped them. Companies are larger and many are taking on institutional financings later in their lifecycle as evident by the growing median age of companies raising venture rounds. This trend is particularly notable the earlier in the investment cycle you look. Since 2013, the median age of companies raising institutional angel & seed rounds has grown a staggering 38% to 2.42 years, with companies at the Series A round coming in at just over 3.5 years of age, and Series B companies typically raising those rounds at around year five, on a median basis. We’ve also continued to witness liquidity cycles stretch to unprecedented levels, driven by record amounts of dry powder ready to be deployed to the outperforming businesses that have proven their going concerns in today’s marketplace. This notion is compounded by a founder and management mentality that has embraced the continued use of private capital to fuel growth, rather than move through an IPO or M&A exit. Just as recently as a few years ago, this wasn’t simply a matter of choice, but also an implicit need to garner the typically large amount of capital needed to drive growth at a later-stage company. That is not the case today. To illustrate, venture financings of at least $50 million have grown at a compounded annual growth rate of some 13% since $84B+ invested for first time since dot-com era US VC activity 2017 a record year in deal value US VC activity PitchBook-NVCA Venture Monitor PitchBook-NVCA Venture Monitor 5 4Q 2017 PITCHBOOK-NVCA VENTURE MONITOR 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2008200920102011201220132014201520162017$50M+ $25- $50M $10M- $25M $5M- $10M $1M- $5M Under $1M Near 50% of value from deals of $50M+ US VC activity ($) by size $6.3$2.4$2.7$13.9$16.3$17.4$19.27 7 9 27 25 24 69 75 49 73 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Deal Value ($B) # of Deals Closed Nearly record unicorn activity US unicorn activity PitchBook-NVCA Venture Monitor PitchBook-NVCA Venture Monitor 2007, more than double the pace at which rounds completed between $25 million and $50 million (6% CAGR) have grown, and at nearly 4x the rate at which rounds between $5 million and $25 million have increased (2.5%-3% CAGR). Further, VC financings of $50 million+ accounted for nearly half of all VC invested in 2017, a staggering figure in and of itself that is even more remarkable when compared to the fact that such rounds represented less than 20% of all VC invested in 2007. Round sizes have also continued to increase and have shown no sign of slowing down, growing at a rapid pace across the entire venture lifecycle. At $6 million, early-stage rounds came in roughly 20% higher than what we saw in 2016, with late-stage rounds growing 14% to $11.4 million. This, coupled with the rounds completed by aging companies that continue to push off full liquidity events, has resulted in a profound rise in private company valuations, particularly at the late stage where we saw median Series D+ valuations jump to $250 million last year, a hike of over 85% relative to the already large $135 million figure we saw in 2016. In many ways, 2017 can be characterized by the record amount of activity we saw involving unicorns. More than $19 billion was invested into such companies across 73 completed fundings, reflecting a YoY increase of over 10% and nearly 49%, respectively. Further, investments in companies valued over $1 billion amounted to more than a fifth of all VC invested last year, yet less than 1% of total deal flow. We’ve also begun to see winners and losers emerge amongst some of the various tech platforms we saw rise over the last half decade or so in areas such as fintech, Big Data, virtual reality and the sharing economy, among others. For example, companies such as Airbnb, Lyft, WeWork, Magic Leap, Unity, SoFi, Wish and Coinbase have all built relatively successful businesses over the last few years, able to continue raising private capital at hefty valuations and contributing to the continued rise of unicorn financings. Early-stage rounds grow in size by roughly 20% Median deals size ($M) by stage $0.9 $1.0 $5.0 $6.0 $10.0 $11.4 $0 $2 $4 $6 $8 $10 $12 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Angel/Seed Early VC Late VC PitchBook-NVCA Venture Monitor Shape the future of the venture industry with NVCA ADVOCACY COMMUNITY & EDUCATION RESEARCH JOIN US! Please contact NVCA with your membership queries firstname.lastname@example.org 202.864.5918 With more than 1,000 lawyers in 19 offices across the United States and Asia, Perkins Coie represents great companies across a wide range of industries and stages of growth—from startups to FORTUNE 50 corporations. Attorneys in our Emerging Companies and Venture Capital practice offer one of the premier legal resources in the nation for venture-backed companies that have IP as a key value driver. Our clients turn to us for guidance on company formation, IP protection and enforcement, financings, corporate governance, technology transactions, product counsel, and mergers and acquisitions, to name a few of the legal areas on which we focus. We also represent investors as they make, manage and divest investments in diverse industries. Learn more at perkinscoie.com and startuppercolator.com. 7 4Q 2017 PITCHBOOK-NVCA VENTURE MONITOR Cryptos, standardization & structured release valves Silicon Valley continues to impress us with its ability to reinvent itself despite a host of changing market dynamics. On a sector basis, we’ve seen a transition away from hardware businesses and a slowdown across the 3D printing and digital health technology markets. Yet just as these platforms, among others, have moved through their respective growth cycles, many others have blossomed today. This year’s flavor revolves around the cryptocurrency markets, with AI and robotics businesses also receiving ample attention. With the backdrop of more than $4.2 billion raised via ICOs in 2017, we’ve continued to see requests from prospective clients to conduct new ICOs, or from businesses looking to create new infrastructure tools such as various digital or hardware wallets. With this increased popularity, however, comes increased complexity from a legal perspective. Despite our active participation in the market, we’ve remained conservative with our approach to serving the industry, following an evaluation framework that spans three primary steps. 1: Token Utility First, we look for tangible underlying utility in the tokens of the businesses we represent. 2: Management review Second, we conduct extensive background checks on the management teams we work with. While we understand the prospective value that can be derived in the market, we also see the structure of the market at times incentivizing bad actors. Thus, we find it even more prudent that we vet the teams we work with. 3: Setting expectations Last, we look to set realistic expectations with entrepreneurs. While on the surface, an ICO may appear a much easier and quicker capital-raising process, the reality is in many situations it isn’t. Properly conducted ICOs can take anywhere from three to five months to move through regulatory, tax and disclosure work, with legal fees that can still reach the same levels seen with small IPOs. To that point, we look to ensure that the businesses we work with not only provide tangible value, but also are well prepared for the process ahead of them. Despite many traditional venture funds moving down market as round sizes have grown, many of the new companies across the aforementioned sectors are availing themselves of seed and early-stage funding via the swathes of angel and sub-$100 million-$150 million vehicles that have grown in popularity over recent years. This produces a challenge in terms of fund formation that we’ve worked to help both new managers and smaller vehicles sidestep. Typically, such vehicles are only working with a handful of LPs and as a result, we’ve looked to adjust the way we structure such funds and genericize the terms of these vehicles to make the process much more cost-effective. For funds raising anywhere from $25 million to $50 million in capital, racking up legal fees in the hundreds of thousands of dollars can be seen as impractical and oppressive to not only the GPs but the LPs and thus, adding a more structured approach in this market has been pivotal. In addition, as round sizes have grown significantly as of late, many of these smaller vehicles lack the capital under management to participate in some of TAKE OUR AR/VR SURVEY. ENTER TO WIN A $500 AMEX GIFT CARD. PERKINS COIE LLP wants to hear from industry leaders in augmented and virtual reality. Please complete our 2018 AR/VR Survey, which expands on our previous report on industry trends and the investment outlook. You’ll be eligible to win a $500 American Express gift card with a completed survey. Individual responses will remain confidential. Start survey>> PerkinsCoie.com/AR/VR Perkins Coie LLP Attorney Advertising Calling All AR/VR Industry Leaders the follow-on rounds of their portfolio companies. However, in an effort to take advantage of their preemptive rights to participate in future financings, we’ve seen an increasing trend of GPs structuring one-time investment funds in the form of special purpose vehicles. These SPVs are structured as separate capital pools set up between the venture partners and their LPs to take advantage of follow-on investment opportunities. As many of these opportunities revolve around companies that both the GPs and LPs typically already know well, the hard work of sourcing, placing and monitoring investments has already been done, effectively offering fund managers a boost in leverage that can be very lucrative. Lastly, the lack of liquidity driven by a dearth of VC-backed exits has been a heightened issue as of late. As companies demonstrate go-to-market, customer adoption and market expansion success, raising capital privately has persisted. Yet through this, companies face significant challenges in providing liquidity to their employees as the bulk of the incentives placed in front of them come in the form of equity. As a result, the use of secondary sales for investors, management and employees has grown. At times, such transactions can be sporadic and opportunistic, but given their expensive nature and complexity, we’ve seen a number of companies look to structure formal, periodic secondary opportunities. These sales don’t completely solve the industry’s liquidity issues, as they are constrained by limits on the amount of vested equity that can be sold, and tend to have difficulty in realizing an optimal price for both employees and investors, given discrepancies between common and preferred stock owned by different groups. Yet at the moment, they do provide a stop- gap measure to help alleviate some of the liquidity challenges aging private companies are facing. Cryptos, standardization & structured release valves, cont. Following a 2016 that saw both capital invested and completed financings at the angel & seed stage drop around 20%, the market stabilized to some extent last year. In lock-step with financing trends across the entire venture market, deal flow in the bucket declined some 13% YoY, with aggregate capital invested growing moderately. As many businesses continue to bootstrap operations or rely on pre- seed funding sources, today’s angel & seed investments have become more institutionalized. As a result, deal sizes have grown, with the median size rising to $1 million last year, up 100% over the last five years. In addition, we’ve seen a significant amount of capital raised by micro VC funds targeting the space. Between 2011 and 2015, the count of micro VC funds doubled, and today sit on roughly $5 billion in dry powder yet to be deployed. What we continue to note, however, is the lower counts in completed financings. Today, more institutional investors are in the market looking to back early-stage startups. The number of companies competing for this capital has also grown considerably over the last few years. As a result, the bar has risen in terms of the KPIs that investors will want to see before investing. This notion, along with the delayed entrance of companies into the traditional seed & angel space will continue to contain deal flow in the size bucket. 9 4Q 2017 PITCHBOOK-NVCA VENTURE MONITOR $429$405$391$1,269$655$631$526$733$823$1,113$1,241$866$1,274$1,084$1,326$1,577$1,278$1,371$2,026$1,854$2,053$2,171$2,078$1,946$1,653$1,749$1,701$1,518$1,579$1,672$1,830$1,7010 200 400 600 800 1,000 1,200 1,400 1,600 $0 $500 $1,000 $1,500 $2,000 $2,500 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2010 2011 2012 2013 2014 2015 2016 2017 Deal Value ($M) # of Deals Closed 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2008200920102011201220132014201520162017$5M+ $1M- $5M $500K- $1M Under $500K 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2008200920102011201220132014201520162017Seed Angel Smaller deals shrinking in number US angel & seed deals (#) by size Angel deals account for larger amount US angel vs seed deals (#) Decline in angel & seed activity has slowed over the past year US angel & seed activity Angel & seed activity PitchBook-NVCA Venture Monitor PitchBook-NVCA Venture Monitor PitchBook-NVCA Venture Monitor 10 4Q 2017 PITCHBOOK-NVCA VENTURE MONITOR $1.4$1.0$1.1$1.2$1.9$1.4$1.5$1.5$1.6$2.1$2.0$1.6$1.8$1.6$1.5$2.0$1.8$1.7$2.2$2.0$2.0$2.4$2.1$2.3$1.8$1.7$2.1$1.7$1.7$2.2$1.7$2.30 200 400 600 800 1,000 1,200 $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q 2010 2011 2012 2013 2014 2015 2016 2017 Deal Value ($B) # of Deals Closed First financings 30.6% 29.3% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 First financings continue decline Percentage of first-financing VC rounds The number of startups receiving their first round has leveled off US first-financing activity 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Angel/Seed Early VC Late VC Angel/seed deals have fallen furthest US first-financing VC rounds (#) by stage PitchBook-NVCA Venture Monitor PitchBook-NVCA Venture Monitor PitchBook-NVCA Venture Monitor Since 1999, Solium has been simplifying the complexities of equity plans through smarter software, remarkable service and trusting relationships. Our Shareworks platform is loved by emerging private companies as well as public enterprises. And more than 10,000 early-stage companies rely on our products and valuation services. Why Solium? Trust a company that manages the equity plans and cap tables of companies that are launching rockets into space, building self- driving cars, disrupting the food delivery business and changing the way we get around. Solium has offices in North America, UK & EMEA and Asia Pacific. Visit us at solium.com. The early stage saw a dramatic increase in capital investment during the fourth quarter, seeing more than $10 billion invested in a single quarter for the first time. Not only is that a 40% increase over the total invested during 3Q, but it is nearly double the amount invested during the same period in 2014, which at the time was the highest we’ve seen of any quarter in the last decade. The 582 transactions completed during 4Q comes in as the second lowest quarterly total of the past five years, however, as we continue to collect data we may see that number inch slightly higher. While increasing deal sizes have become a common fixture, such deals at the early stage illustrate how excessive dry powder in the industry is not solely reserved for late-stage plays, but even mid-sized and early ones. The market will continue to cycle through various trends, and while investors might be looking to be more selective before investing in what they see as the next quality blockchain, robotics or AI business, they’ll continue to make larger initial, and follow on bets across the industry. 11 4Q 2017 PITCHBOOK-NVCA VENTURE MONITOR Early-stage VC $3.0$2.5$2.7$2.5$3.3$2.9$3.5$3.8$3.0$3.6$3.1$3.0$3.2$3.7$3.2$4.4$4.6$5.1$4.8$5.5$4.9$7.0$6.1$5.9$5.9$6.4$5.7$5.0$5.8$7.3$7.3$10.20 100 200 300 400 500 600 700 800 900 $0 $2 $4 $6 $8 $10 $12 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2010 2011 2012 2013 2014 2015 2016 2017 Deal Value ($B) # of Deals Closed 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2008200920102011201220132014201520162017$25M+ $10M- $25M $5M- $10M $1M- $5M $500K- $1M Under $500K 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2008200920102011201220132014201520162017$25M+ $10M- $25M $5M- $10M $1M- $5M $500K- $1M Under $500K Large deals bolstering early-stage tallies US early-stage activity (#) by size Deals
The fourth quarter of 2017 bookended the year as the third consecutive quarter with more than $20 billion deployed into US venturebacked companies, and marked the close of a strong year of investment that surpassed $80 billion annually for the first time since the dot-com era. Investors deployed $23.75 billion into 1,772 companies in 4Q, the fewest since 4Q 2011, bringing the annual total to 7,783 and marking the lowest level since 2012.
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