Investment in Venture Capital-backed Companies on Pace to Exceed $100 Billion By End of 2018

Mega-Funds Fuel Strong Dealmaking, Particularly in Late Stage Startups and Unicorns as Investors Compete Fiercely for Deals; Several Outsized Exits Drove Exit Value & Provided Much-Needed Liquidity

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Oct 09, 2018, 00:01 ET

SEATTLE, Oct. 9, 2018 /PRNewswire/ -- In the third quarter of 2018, investment into US venture capital-backed companies topped $27.8 billion, pushing 2018's total venture capital (VC) deal value to $84.3 billion. At this pace, 2018 could hold the mark for most venture capital invested in the US in a single year, 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). Findings reveal 2018 median VC deal sizes experienced double-digit percentage growth across all stages compared to 2017, the highest jump since 2015. The steady increase in deal sizes can be attributed to the growing number of mega-funds raised, as investors increasingly view larger vehicles as a competitive advantage to invest in high-quality startups. This can be seen by the growing proportion of venture investment in the late stage, which made up nearly 23% of total VC deal count, the highest percentage since 2011. Additionally, the VC exit market has shown signs of strength, with $20.9 billion exited across 182 deals in 3Q, bringing the yearly total to $80.4 billion. Sustained dealmaking in the later stage of the VC market is expected to drive more outsized exits for the duration of this market cycle, suppressing investor concerns over liquidity.

To download the full report and data packs, please click here. PitchBook and NVCA will also be hosting a webinar in partnership with Silicon Valley Bank, Perkins Coie and Solium, on Tuesday, October 30, 2018 from 9:00am – 10:00am PDT. Please click here to register.

"The first three quarters of 2018 show that the investment environment for venture-backed companies is the strongest it has been in well over a decade," said Bobby Franklin, President and CEO of NVCA. "The ongoing trend of concentration of capital into fewer, larger investments appear to be the new status quo for the venture industry – not a passing phase as was once believed. We see this transformative shift reverberating across all stages and sectors. Other ongoing shifts in the industry to watch as the year comes to a close include whether the IPO window for tech companies opens further, and if the increasing attention and interest of venture investors in non-coastal regions of the country turns from optimism into practice."

"The overarching trend we're seeing in private markets is ever-growing sources of capital facilitating larger VC rounds, driving investment totals higher across the VC environment," said John Gabbert, founder and CEO of PitchBook. "There is a question of whether greater competition among investors and the general capital availability is a good thing – as investors may run the risk of overlooking company fundamentals and inflating valuations. At the same time, the exit market appears exceptionally healthy so far this year, especially through its support of large exits at or above their last private valuation."

Investment Activity
Following the trend observed in previous quarters, investors continued to deploy larger amounts of capital across fewer VC deals, contributing to record-high deal sizes and a decline in deal counts. While volume trended downward across all stages, most notably in the angel and seed stage (21.9% decline from 2Q 2018), the number of completed mega-rounds (at least $100 million) increased 38.8% from last year and made up 37.1% of total VC invested. Many of these mega-deals were investments in VC-backed unicorns, which made up 22.8% of total VC deal value, the highest proportion tracked. Also putting upward pressure on deal size was increased participation from non-traditional investors and corporate venture capital (CVC) investors. Through the third quarter, aggregate deal value for rounds with CVC involvement was $39.3 billion, already surpassing 2017 annual totals and representing nearly half (46.7%) of overall venture investment. Activity was prompted by recent corporate tax cuts, capital repatriation as well as the need to fund strategic investments and partnerships aimed at enhancing technical capabilities, e.g., a company integrating artificial intelligence (AI) into its product roadmap as most industries move toward tech-based products and services.

Exit Activity
While the number of exits trended downward (8.1% year-over-year) in 3Q 2018, exit value ($20.9 billion) has positioned the exit market to easily exceed full-year 2017 and reach the highest levels since 2014, an outlier year due to Facebook's acquisition of WhatsApp for $22 billion. Several outsized VC exits completed in the third quarter drove exit value, including the acquisition of former unicorn, AppNexus (~$2 billion). The growing trend of large exits is a symptom of the growing role of VC in the later stage of the company lifecycles and availability of capital from VC's as well as non-traditional investors. Nearly 21% of VC-backed exits were at least $100 million, compared to 16.3% of companies in the year prior. What's more, median VC-backed exit size settled at $150 million, while average exit size rose to $390.2 million, a 41.5% and 10.6% increase over 2017, respectively. Regarding exit type, the IPO market hit its stride in the third quarter with notable exits including, Bloom Energy ($270 million), Tenable ($250 million) and Rubius Therapeutics, ($241 million). The life sciences sector made up a significant share of IPOs, with 17 out of the 23 VC-backed IPOs in 3Q, and 45 out of 68 of YTD IPOs.

Fundraising Activity
Venture fundraising remained healthy in 3Q 2018 with fund count and size increasing from 2017 and pushing 2018 past $30 billion in commitments for the fifth consecutive year. The fundraising environment showed fund managers increasingly targeted larger vehicles to keep pace with ever-growing VC deal sizes and more non-traditional VC capital available at later stages. Median and average fund sizes have moved higher to $68 million and $151 million, respectively. What's more, five vehicles of $1 billion or greater have closed in 2018, already surpassing 2017 annual total for billion-dollar fund count (three total). Two market shifts can explain the uptick in larger fund sizes. First, SoftBank's Vision Fund has turned outsized financings into a competitive pawn when looking to close deals with leading late-stage startups. Only those investors with larger funds can afford to write the check sizes now expected by high-quality late stage startups. Secondly, the outperformance of larger fund vehicles has compelled limited partners to gradually increase allocations to the venture asset class, increasing demand for vehicles meeting minimum investment thresholds.

The full report will include the following components:

Overview
Investment activity by stage
SVB: Breaking down SVB's PE practice
SVB: Venture debt in a booming tech market
Perkins Coie: How PE plays into VC-backed exits
Solium: Liquid gold
Exit activity
SVB: How to spot Space 2.0 opportunities
Fundraising
League Tables
Methodology

To download the full report, click here.

About PitchBook
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About the National Venture Capital Association
Venture capitalists are committed to funding America's most innovative entrepreneurs, working closely with them to transform breakthrough ideas into emerging growth companies that drive U.S. job creation and economic growth. As the voice of the U.S. venture capital community, the National Venture Capital Association (NVCA) empowers its members and the entrepreneurs they fund by advocating for policies that encourage innovation and reward long-term investment. As the venture community's preeminent trade association, the NVCA serves as the definitive resource for venture capital data and unites its member firms through a full range of professional services. For more information about the NVCA, please visit www.nvca.org.