The FINANCIAL -- Venture capital (VC) investment continued to remained strong, dominating with $21.5B total invested, which is just shy of the record high of $23.4B invested in Q2’16 and $22.9B invested in Q2’17, according to Venture Pulse, a quarterly report on global VC trends published by KPMG.
Activity suggests that deal sizes were augmented by mega deals with top U.S. funding rounds exceeding over $100M, despite the fall in the number of deals closed. Although the IPO market has improved, corporate venture capital (CVC) has grown in relevance.
“Corporate venture capital continues to be an important source of financing to watch,” said Brian Hughes, National Co-Lead Partner, KPMG LLP’s Venture Capital Practice. “In Q3, about 16 percent of U.S. venture financings included a corporate venture arm – a figure that has risen over time. CVC has morphed from a niche of the VC world to a vehicle for corporations across all industries to inject innovative ideas and technology into their existing products and services. Looking forward, we expect to see CVC participation continuing to increase.”
While total investment remains strong, the total number of deals closed has continued to decline, with 1,698 first time VC deals closed for the year thus far compared to 2,663 in 2016 – evidence that investors are taking a “quality over quantity” approach when assessing which companies to invest.
“VC firms in the U.S. are taking less of a ‘quantity’ approach than they have in the past –whereby they invested in a lot of companies looking to get one or two big winners,” said Conor Moore National Co-Lead Partner, KPMG LLP’s Venture Capital Practice. “Today it appears that investors are being more selective as where to place their investments. They are taking more time to find the real quality opportunities.”
The U.S. also experienced a continued decline in the number of seed and angel stage deals in favor of late-stage deals. While the number of deals at the earliest investment stages has declined, the median deal size associated with early-stage deals has gone up substantially.
The increase in median deal size suggests that in efforts to de-risk early-stage investments, investors are conducting more due diligence on early-stage deals and investing larger amounts into a smaller number of companies. As a result, there is more competition among VC investors for the best early-stage deals, while reducing the number of deals overall.
From a regional perspective, investors are looking at geographic expansion as the industry matures. Participation in VC remains high in the Bay Area despite the 22 percent decline in overall volume with $6.9M unvested for the quarter. In the Los Angeles area, startups are benefitting from significant hype as investment value and volume remains healthy at 122 deals closed and $1.2M invested. In Boston, VC investment increased by 45 percent over 119 deals boosted by biotech funding that accounted for half of the largest U.S. VC deals.