US Market Review and Outlook
REVIEW
Following record levels of financing activity and proceeds in 2014 and 2015, the venture capital market cooled in 2016, with a decrease in the number of financings and a sharp contraction in valuations. Despite the decline in deal flow, however, the $52.4 billion invested in the US venture capital ecosystem still represented the third-highest annual total since 2000. Once all 2016 deals are accounted for, the number of 2016 venture capital financings should be commensurate with the 4,039 deals in 2013. VC-backed company liquidity activity was mixed in 2016, with the M&A market producing strong levels of acquisition activity and attractive valuations, while the IPO market declined for the second consecutive year to its lowest annual level since 2009.
Equity Financing Activity
The number of reported venture capital financings declined by 12%, from 4,244 in 2015 to 3,718 in 2016. Even adjusting for the normal lag in deal reporting, deal flow appears to have slowed toward the end of the year, with the 862 deals in the fourth quarter representing the lowest quarterly tally since the first quarter of 2011.
Total reported venture capital financing proceeds contracted by almost one-third, from $77.3 billion in 2015 to $52.4 billion in 2016. Despite falling short of the total annual proceeds in 2014 and 2015, the 2016 figure is 52% higher than the annual average of $34.5 billion that prevailed for the three-year period preceding 2014.
The median size of all venture capital financings decreased 12%, from $5.8 million in 2015 to $5.0 million in 2016— but still tied with 2009 and 2014 as the second-highest level since 2008. The median size of first-round financings decreased 8%, from $3.25 million in 2015 to $3.0 million in 2016. The median size of second-round financings decreased by a wider margin, down 15%, from $7.3 million in 2015 to $6.2 million in 2016. Later-stage financings experienced the largest decline, their median size contracting by 28%, from $15.0 million in 2015 to $10.9 million in 2016. While the 2016 figure is also well shy of the $14.0 million figure for 2014, it is comparable to the $10.0 million annual median that prevailed between 2011 and 2013. In this light, 2016 should be regarded as a return to normalcy following a two-year period with elevated valuations.
After increasing for five consecutive years, the median financing size for life sciences companies declined from $9.5 million in 2015 to $7.6 million in 2016. For technology companies, the median financing size remained steady at $5.0 million, still significantly lower than the typical annual median during the ten-year period preceding 2009. The general decline in the median financing size for technology companies in recent years is at least partly attributable to technological advances that have enabled startups to commence and grow their operations with a lower level of funding than historically required—in many cases, cloud computing and open-source software have replaced the need to purchase expensive server racks, hire support staff and acquire costly software licenses.
Between 2012 and 2015, the volume of very large financings increased dramatically, as venture-backed companies increasingly relied on IPO-sized later-stage rounds of financing—sometimes with the intention of eschewing the public markets entirely. The number of financing rounds of at least $50 million increased from 83 in 2012 to 112 in 2013, almost doubled to 209 in 2014, and then increased a further 35% to 283 in 2015. The number of financing rounds of at least $100 million increased from 19 in 2012 to 28 in 2013, more than doubled to 63 in 2014, and then leapt another 63% to 103 in 2015.
To view the full article please click here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
