Slowdown Continues in First-Quarter VC Funding—and Top 10 Deals

Is a caution flag flying?

While U.S. venture firms refueled last year by raising a near-record $51.6 billion, they also eased off the throttle in terms of their investment activity during the first quarter of 2017, according to data released today by Seattle-based PitchBook and the National Venture Capital Association (NVCA).

According to the latest Venture Monitor report, VCs invested slightly more than $16.5 billion in 1,797 startups in the first three months of the year. That’s down almost 12 percent from the $18.7 billion that VCs invested during the same quarter of 2016, and a 24 percent drop from the 2,379 deals in the year-ago quarter, according to Venture Monitor data. (Our rundown on VC activity in the prior quarter is here.)

Software investments accounted for more than a third of the total investments, according to the Venture Monitor report. About 13 percent went into pharmaceutical and biotech startups.

The decline suggests that the deceleration that began last July has continued into 2017, according to the quarterly review of the VC ecosystem. It also may be worth noting that the PitchBook list of top 10 funding deals nationwide (the list is below) only features one $1 billion-plus funding deal—a $1.003 billion investment in Airbnb.

U.S. Venture Capital Investment Trends by Quarter

Q1 and Quarterly Venture Activity (Chart courtesy Venture Monitor and PitchBook/NVCA)

Because venture firms have stockpiled plenty of cash, though, the report said the slowdown is not representative of a fundamental decline in venture funding, “but rather a return to a more-disciplined approach with a much-more critical eye on investment opportunities.” In a press release accompanying the report, Bobby Franklin, president and CEO of the National Venture Capital Association says, “We are in fact returning to a more rational level of investment activity more in line with the annual growth rate of the industry over the last ten years.”

The Venture Monitor report noted that 58 venture funds added another $7.9 billion to their stockpile of dry powder during the first quarter. That was down roughly 24 percent from the $10.3 billion raised during the same period last year, but it’s still high in comparison to fund-raising over the past decade or so.

VC fund-raising also is down from an extraordinary period (from 2015 through 2016) in which 12 venture funds each raised $1 billion or more. If anything is noteworthy in the stats for first-quarter VC fund-raising, it is the absence of mega-fund deals.

Likewise, overall exit activity among venture-backed companies also continued to slow. Of 169 exits by VC-backed companies, only seven were IPOs. The overall value of exits was up to $14.9 billion, but Venture Monitor notes that two deals accounted for almost half of the total: Snap (NYSE: SNAP) raised $3 billion in its IPO and Cisco (NASDAQ: CSCO) paid $3.7 billion to acquire AppDynamics.

Extrapolating from the first quarter, the PitchBook team said venture activity so far is on pace to see $66 billion invested in some 7,200-plus deals. In terms of total dollars invested, that would be just slightly lower than 2013.

The top 10 venture deals for the quarter, based on PitchBook data, are:

Airbnb $1.003 billion San Francisco Software
SoFi $454 million San Francisco Other
Instacart $413 million San Francisco Software
Letgo $175 million New York Software
Vir Biotechnology $150 million San Francisco Healthcare
Proterra $140 million Burlingame, CA Other
Wheels Up $121 million New York Software
DraftKings $119 million Boston Software
Bright Health $115 million Minneapolis Software
Zoom Video $115 million San Jose Software

 

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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