2017 Venture Capital Trends Summary

Transcription

1 2017 Venture Capital Trends Summary Prepared by: Hitesh Kothari, Partner, RSM US LLP November 2017 Overview In the last 10 years, the deal flow in the venture capital industry during the first half of 2017 is at its thirdhighest level, only behind 2015 and This has mainly been fueled by the record exits that occurred in 2014 and 2015, both through the initial public offering (IPO) process and mergers and acquisition (M&A) deals. This created a euphoria amongst the fund managers who were willing to invest in deals at higher premoney valuations in companies that could be the next Uber, Twitter, Facebook or WhatsApp. The median premoney valuations of Series A and Series B rounds have increased by only 2 percent, and that of Series C has only increased by 7 percent in 2017 compared to 2016; however, the median premoney valuation of Series D and subsequent series have increased by a whopping 77 percent in 2017 compared to This is mainly because the holding period for securities of later series is comparatively less than holding securities in the earlier rounds. This has resulted in bumping up the entry prices of investments in Series D, E and F rounds. The fund managers do not want to exit unless they have made a reasonable ROI on their investment. They re looking for buyers who will give them a premium and aren t going to settle for exits that only break even. However, the exit markets in the first half of 2017 have not been as buoyant as in 2015, which will have an impact on the subsequent period s deal flow.

2 Fundraising by venture capital funds By deals During the first half of 2017, the venture capital (VC) investment aggregated $37.7 billion from 3,917 deals compared to $39.8 billion from 3,967 deals for the similar period in This marks a decrease of 5.2 percent in dollar terms, and the number of deals being pretty flat in 2017 compared to The VC investment for 2017 in dollar terms is also lower than 2015 by 5 percent, but higher than 2012 and 2013 by 81 percent and 2014 by 11 percent. In terms of the number of deals, it is lower than 2012 by 4 percent, 2013 by 13 percent, 2014 by 25 percent and 2015 by 28 percent. This signifies a tremendous increase in average deal size, ranging from $5.1 million in 2012 to $9.6 million in Fundraising by venture capital funds $69.6 $ $41.0 $ $39.8 $ By number of funds There were 119 VC funds that were raised in first half of 2017 aggregating $19.1 billion compared to 134 VC funds aggregating $22.5 billion during a similar period in This marks a decrease of 11 percent in the number of VC fund launches and 15 percent decrease in dollar terms. However, compared to the last five years, the deal flow in 2017 is higher by 47percent compared to 2012, 84 percent compared to 2013 and 8 percent higher compared to Funding by industry Deal value ($B) # of deals closed ('00s) Investment in the pharmaceuticals and biotechnology sector increased by 11.5 percent in the first half of 2017 to $4.6 billion compared to $4.1 billion in In terms of the number of deals, there was an increase of 10 percent to 274 deals in 2017 compared to 249 deals in Thus, this indicates a slight increase in average deal size from $16.5 million in 2016 to $16.7 million in The software industry received the highest VC funding both in dollar terms and in the number of deals in the first half of 2017, which was consistent with the prior year. Overall, the software industry received the highest funding of 42 percent in dollar terms and 37 percent in deal terms in The amount invested in the software industry was $15.9 billion in 2017, which was lower by 22.8 percent, amounting to $20.5 billion, during the same period in The number of deals in the software industry was pretty flat in 2017 at 1,446 deals compared to This indicates a decrease in average size of $11.0 million in 2017 compared to $14.2 million in The information technology hardware industry received VC funding of $1.1 billion from 97 deals in 2017, registering a 17 percent increase in dollar terms compared to 2016 where $0.9 billion were invested across 91 deals. This indicates a slight increase in average size of $11.6 million in 2017 compared to $10.6 million in The VC funding in the consumer goods and recreation industry decreased to $ 0.7 billion in 2017 compared to billion in 2016, registering a decrease of 25 percent. The number of deals also decreased to 129 deals in 2017 compared to 162 deals in Due to this, the average deal size in 2017 decreased slightly to $ 5.7 million compared to $ 6.0 million in The commercial services industry registered an increase of 8 percent in the amount of funding from $2.1 billion in 2016 to $ 2.2 billion in However, the number of deals registered a decline of 18 percent from 331 deals in 2016 to 271 deals in This caused an increase in the average deal size from $6.3 million in 2016 to $ 8.3 million in

3 US venture capital activity in 2016 and 2017 by sector Software Pharma and biotech Other Media IT hardware HC services and systems HC devices and supplies Energy Consumer goods Commercial services in 2016 (#) in 2016 ($B) in 2017 (#) in 2017 ($B) , $0.8 $3.9 $5.7 $4.1 $2.1 $ ,040 1, $1.5 $1.1 $0.5 $1.2 $2.9 $2.2 $7.1 $4.6 $15.9 (#)* ($B)* 1,600 1,400 1,442 1,446 $25.0 $20.5 1,200 1, ,040 $20.0 $15.0 $ $10.0 $5.0 $ $4.1 $4.6 $5.7 $7.1 $0.8 $1.2 $1.1 $3.9 $1.5 $2.9 $0.5 $2.1 $2.2 On an overall basis, funding in the software industry during 2017 of 42 percent of the total funding across various industries represented the highest funding across all industry sectors, followed by the pharmaceutical and biotech industry of 12 percent, followed by commercial services, which represented 6 percent. The same industries also received the highest funding in 2016, with software industry receiving 52 percent, pharmaceutical and biotech industry receiving 12 percent and commercial services receiving 5 percent of the total funding. Funding by stage of development Seed stage: Investments in seed stage companies during the first half of 2017 decreased to $3.1 billion compared to $3.7 billion during the similar period in 2016, registering a decrease of 14 percent. However, the number of deals during 2017 decreased to 1,829 deals compared to 2,050 deals in 2016, registering a decrease of 11 percent. Thus, this indicates a slight decrease of approximately 3 percent in the average deal size of $1.7 million in 2017 compared to $1.8 million in Early stage: Investing in early stage companies registered a decrease of 7 percent in the first half of 2017 at $11.5 billion compared to $12.4 billion for the similar period in However, the number of deals in 2017 increased to 1,205 deals compared to 1,142 deals in 2016, registering an increase of 6 percent. Thus, this indicates a decrease in the average deal size of $9.5 million in 2017 compared to $10.8 million in Late stage: Investments in late stage companies in the first half of 2017 decreased marginally to $23.0 billion from $23.6 billion in 2016, registering a slight decrease of 3 percent. The number of deals in 2017, however, increased by 14 percent to 883 deals compared to 775 deals in Thus, this indicates a slight decrease in the average deal size of $2.6 million in 2017 compared to $3.0 million in

4 Total # of deals 2016 (1H) vs 2017 (1H)* Total deals ($B) 2016 (1H) vs 2017 (1H)* 3,000 2,000 1,000 2,050 1,829 1,142 1, $30.0 $20.0 $10.0 $3.7 $3.2 $12.4 $11.5 $23.7 $23.1 Seed round Early stage Late stage $ Seed round Early stage Late stage Based on investing of the funds across various stages of development, approximately 61.1 percent of the total funding was made in late stage companies in 2017, which was slightly lower by 1.6 percent and 2.4 percent compared to 2016 and 2015, respectively; however, was higher by 3.4 percent compared to Investing in early stage companies was 30.5 percent of the total funding, which was similar to 2015 level, but lower than 2016 by 2.4 percent. Investing in early stage companies has been steadily decreasing since In 2017, it received 8.4 percent of the total funding compared to 11.1 percent in 2015 and 9.8 percent in Compared to the last five years, the financing across all stages of development in 2017 was higher than 2012 through 2014 but lower than 2015 and This is mainly due to record exits in 2014 and 2015, which led to an increase in the deal flow across all stages of development in 2015 and This supports the earlier conclusion that the increase in proportion of investments in the late stage companies is mainly due to higher entry prices for Series D and subsequent series caused by new investors investing at higher premoney valuations. As the gestation period of investing in late stage companies is shorter, the fund managers have been successful in making early exits from late stage companies and reharvesting a portion of these proceeds in early stage companies. This has led to an increase in investments in early stage companies from 2015 through Firsttime financing Firsttime financing (companies receiving venture capital financing for the first time) in 2017 increased from $3.3 billion in 2016 to $3.8 billion in 2017, registering an increase of 15 percent in However, the number of deals in 2017 reduced to 1,137 deals from 1,434 deals in 2016, registering a decrease of 21 percent. This increased the average deal size from $2.3 million in 2016 to $3.3 million in Firsttime financing accounted for 10.1 percent of the total dollars invested and 29 percent of the total deals completed in 2017, compared to 8.4 percent and 36.1 percent, respectively, in The following graphic shows the firsttime financing since 2012: Trend of firsttime financing (amount invested)* Deal value ($B) Trend of firsttime financing (# of deals)* # of deals closed $10.0 5,000 $8.7 $7.5 $6.9 $6.6 $7.8 4,000 3,279 3,555 3,746 3,391 3,000 $5.0 $2.5 $3.3 $3.8 2,000 1,000 1,434 1,137 $

5 Venture capital exits In the first half of 2017, there were 348 venture capital exits aggregating $25.2 billion compared to 329 exits aggregating $24.2 billion in The average size of the exit reduced slightly by 2 percent from $73.7 million in 2016 to $72.3 million in The ratio of investment in deals to exits was 12.05x in the first half of 2016, which reduced to 11.25x in This ratio in 2017 has been higher compared to Segregating by different types of exits, the biggest change was in exits through IPOs, which increased from 18 exits in 2016 to 27 exits in 2017, an increase of 50 percent. This was followed by exits through buyout, which increased from 44 exits in 2016 to 65, signaling an increase of 48 percent. However, there was a slight decrease in exits through acquisition, which decreased by 4 percent, from 267 exits in 2016 to 256 exits in Exits by industry For 2017, exits in the software industry were the highest at 188 exits aggregating $12.1 billion. This represented 54 percent in terms of number of deals and 48.2 percent in dollar terms. The exits in the software industry increased by 23.7 percent from 152 exits in 2016 to 188 exits in The exits in the pharmaceuticals and biotechnology industry followed next with 25 exits aggregating $3.4 billion. This represented 7.2 percent in terms of number of deals and 13.4 percent in dollar terms. The exits in the pharmaceuticals and biotechnology industry decreased by 7.4 percent from 27 exits in 2016 to 25 exits in This was followed by exits in the commercial services industry which had 31 exits aggregating $1.1 billion. This represented 8.9 percent in terms of number of deals and 4.3 percent in dollar terms. The exits in the commercial services industry decreased by 31.1 percent from 45 exits in 2016 to 31 exits in Number of exits by type* Number of exits by sector* Acquisition IPO Buyout Conclusion and outlook for 2017 On an overall basis, during the first half of 2017, the overall exits have declined compared to 2014 and 2015 levels, but they have been slightly better compared to The ratio of US VCbacked investments versus US VCbacked exits was 11.3x in 2017, compared to 9.9x and 10.5x in 2014 and 2015 when the exit markets were buoyant. However, the ratio in 2017 was slightly better than 12.1x in The decline in the VC exits compared to 2014 and 2015 is mainly due to higher premoney valuations for Series B through Series D rounds that has bumped up the entry prices of the investment. This is coupled with the fact that some of the unicorns have opted to stay private for much longer than the normal expected exit period which has led to lower exits in 2017 compared to 2014 or However, there has been some entry price correction in 2017, which has increased the exit value by approximately 4 percent compared to The VC industry is still adjusting to the new Trump administration and awaiting announcement of new policies, including the tax reforms that are expected to roll out in Q4 of Based on analysis made by RSM US LLP chief economist, Joe Brusuelas, the U.S. economy was forecasted to grow by approximately 1.9 percent in However, the growth in Q was 1.4 percent and in Q2 was 2.5 percent, which was fueled by a robust consumer spending and a thriving labor market which were the two primary drivers of growth. The growth throughout the U.S. economy will cause an uptick in the stock market that could fuel VC exits in 2017 and thus help in sustaining the deal flow in the VC industry for the remainder of 2017 and early part of

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