Investors Deployed Record Amount of Capital to Venture-Backed Companies in 1Q 2018, Despite Slower Pace of Fundraising and Sluggish Exit Market; Industry Remains Optimistic for Another Banner Year, According to 1Q 2018 PitchBook-NVCA Venture Monitor
SEATTLE, WA – Investment into venture-backed companies is already on pace to experience another record-breaking year in 2018, according to the PitchBook-NVCA Venture Monitor, the authoritative quarterly report on venture capital activity in the entrepreneurial ecosystem jointly produced by PitchBook and the National Venture Capital Association (NVCA). Coming off multiple years of record fundraising, just over $8 billion raised in 1Q 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 count as 2018 unfolds. The sustained momentum in venture fundraising has continued to fuel ramped dealmaking. Investors deployed the highest amount of capital in 1Q 2018 than any single quarter since 2006 ($28.2 billion), with unicorns attracting over 18% 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 $1.2 billion acquisition of Ring and DropBox’s $756 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,” said Bobby Franklin, President and CEO of NVCA. “As we look ahead to the rest of the year, 1Q 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 U.S. 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,” said 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.”
By quarter’s end, venture fundraising paced below 2017 levels with $7.9 billion committed across 54 vehicles. The dip can be traced back to the growing demand for micro-funds (vehicles smaller than $50 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 $50 million in 2017 to $38 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 $1 billion-plus funds closed in the first quarter and more in the pipeline. Vehicles over $1 billion made up 36% of total capital raised in 1Q 2018 led by Norwest Venture Partners’ $1.5 billion fund, General Catalyst Partners’ $1.37 billion fund and Battery Ventures’ $1.25 raised across two complementary vehicles. Khosla Ventures, Sequoia, Lightspeed Venture Partners, and Social Capital have all announced intentions to raise funds of $1 billion or more in the coming months.
Investors hit the ground running in 1Q 2018, deploying $28.2 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 $50 million, representing 14% of total deal value and the first quarter to surpass 100 financings over $50 million. What’s more, the median deal size took the largest jump PitchBook has tracked. The average early stage deal was 65% larger compared to 2017, while the average late-stage deal tracked 42% higher than 2017’s year-end figure. Continued investment in unicorns (venture-backed companies valued at $1 billion-plus) played a role in elevating late-stage deal sizes. In 1Q 2018, 17 unicorns attracted a combined $5.2 billion net new capital, over one-quarter of total capital deployed to venture-backed companies, the second-highest quarterly deal value share PitchBook has tracked. The larger deal sizes make sense due to the rise in median age of companies raising rounds at each stage – the median age of a 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 1Q 2018, with $8.1 billion in disclosed exit value across 188 reported deals – the lowest exit count and value since 4Q 2011 and 1Q 2013, 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 $1.2 billion acquisition of smart security device company, Ring, was the largest acquisition of the quarter. Additionally, there were 15 venture-backed IPOs in 1Q 2018, led by storage platform Dropbox’s public debut, which raised $756 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.