From a global perspective, 2016 was an immensely bullish year that witnessed the highest level of venture investments in the last five years. What is interesting is that while the global economy was benefiting from a push in the venture capital investments in tech startups, the U.S. experienced a decline in VC investments.
A careful look into how the global economy faired reveals that it experienced a very strong final quarter that was buoyed by some exceptional fundraising by major companies that include Didi Chuxing, Snapchat and Uber. These large fundraising rounds that took place at the end of the year helped the overall market recover from previous quarters that experienced declines in VC investments.
What is interesting is that the most pronounced investment contraction, as far as VC investments in the U.S. are concerned, took place in the final quarter of the year. In fact the contraction was so pronounced that it had an impact across all existing stages. While all of the numbers are not currently in, experts are projecting that the VC investment numbers for the U.S. will be the lowest they have been in over three years. One area that was significantly impacted by these declines investments is seed and early stage investments — experiencing a decline in investments of more than 32 percent in comparison to the numbers during the same time in 2015. The previous quarters in 2016 had seen the predominate declines in VC investing taking place in late stage funding; however, the last quarter produced an environment in which early stage investments also took a significant hit.
The exit climate was mixture of activity that included venture-backed IPO activity that can only be classified as immensely weak, producing and environment in which U.S. technology offering were at a multi-year low. On the other hand, offerings focused on the life sciences were more in abundance, while biotech and tech companies were able to execute reasonably large IP0s. The good news is that M&A, which accounts for a significantly large portion of exits, maintained an immensely strong position overall.
Some noteworthy points for 2016 include:
- Seed deal became larger — Over the entire year, seed deals became increasingly larger; however, it became increasingly difficult to fund these deals as the year progressed. While the angel-seed investment reported an increase of over 30 percent — exceeding 900k, the deal volume declined during that same time, experiencing a 15 percent drop during the final quarter.
- On a global level, VC grew by 19 percent — The total venture and seed funding for the year of 2016 is expected to reach $176 billion, which is significant, reaching the highest total in the last five years.
- In the U.S., the number of seed rounds were down by 25 percent — The U.S. experienced a phenomenon in which the number of seed rounds dropped to its lowest point since 2012. Additionally, early stage funding experienced a drop of five percent, and late stage funding experienced a more significant decline of 15 percent.
- In the U.S., VC investments fell by 11 percent — The projections for 2016 have venture investments in the U.S. down to $76 billion, which is a $10 billion decline from 2015.
- There was also a decline in new unicorn formation — During 2015, a new private unicorn was created at a rate of one every three days. In 2016, there were only 40 companies with valuations in excess of a million dollars being minted by investors.
While these declines in 2016 are significant and require investors and business owners to take notice, many experts are suggesting that post-seed financing will experience significant gains in 2017. This particular category is relatively new, and it represents venture and angel investors that are backing startups that have already raised seed capital, while simultaneously demonstrating a certain level of early product-market fit.
Generally speaking, post-seed rounds remain in the $1 million to $2 million range, and existing empirical data reveals that post-seed investors have already had an impact on the media size of a pre-venture round of fundraising.
One thing that has had a significant influence on the rapid growth of post-seed funding is consistent supersizing of investment funds that operated by multi-stage and top-tier firms — with an increasing number of these firms now exceeding $1 billion. Another important factor to consider is that the bountiful fundraising rounds experienced by multitudinous startups in 2014 and 2015 means that there will be a number of founders who will be looking for second-round funding opportunities. It is activity like this that create huge market opportunities for post-seed investors.
Something else to give attention to is the IPO market, which is expected to gain momentum in 2017. One reason that IPOs are looking more appealing moving into the beginning of 2017 is due to the fact that private valuations dipped in 2016, if this continues, taking companies public will definitely be more appealing to founders that are looking for consistent ways to raise the necessary capital for their companies to compete on a global landscape.
As early as it is in the year, the 2017 IPO market is in a position to completely outperform what it did in 2016. Leading the way is Los Angeles-based Snap Inc., which is currently planning an IPO offering at a valuation of $20 billion to $25 billion. If Snap is successful with this offering, it will be logged as the largest venture-backed IPO offering in years. There are multitudinous other startups that are in a position to follow suit, including Dropbox, Uber, Pinterest, Slack and Spotify, to name a few. So, the IPO market has set itself up well. The key will be whether it all plays out as expected.
While there is substantially more to consider when attempting to navigate the labyrinthine corridors of VC investments, and how things will play out over the next 11 months, the core elements presented here reveal that it will be necessary for startup founders to be careful in how they schedule their fundraising efforts, while investors will have to determine whether early-stage funding or late-stage funding will be the way for them to go.