Investment in VC-Backed Companies Declines Late 2016; Overall Year Strong

A Quarterly Wink and a Glance at Venture Capital

Investor caution continued into Q4 2016. In Q4, venture capital investors deployed $11.7B in approximately 980 companies. This represented a 14% decline in the number of deals and a 17% decline in funding from Q3. In fact, quarterly deal count declined in every consecutive quarter in 2016. The number of deals in Q4 dropped below 1,000; this hasn’t happened since Q4 2011. Although Q4 achieved the lowest dollar funding since Q4 2013, there were still 11 financings of $100M or more. There was also a $1B financing in Q4, with OneWeb raising $1.2B primarily from Japan’s SoftBank.

After a very active 2015, venture capital investment cooled somewhat in 2016. For all of 2016, venture capitalists invested $58.6B in 4,520 deals, which is considerably below the $73.3B invested in 5,406 deals during 2015. While the 2016 numbers were below 2015, it did not lead to another tech bubble or a collapse in funding, which many industry experts predicted. All things considered, 2016 compared quite favorably to a typical year for venture capital investing in terms of deal activity and funding.

Investors Remain Cautious on Valuation Investors continue to be somewhat reserved on valuations, with only 4 new companies earning “unicorn” status in Q4. Unicorn creation declined tremendously from its peak of 16 in Q3 2015.

Regional Activity Major tech centers (Silicon Valley, New England and New York) showed a decline in investment activity in Q4. Silicon Valley exhibited sharp declines with 37% less dollars and 22% fewer deals than in Q3. New England, including Boston, also trended down with deals decreasing 6% and funding 41% lower. The New York Metro region saw the number of deals decline by 17% in Q4, however, total dollars increased 12%, due to significant funding rounds for WeWork and Buzzfeed.

What Sectors Are Attracting the Dollars In Q4, the sectors receiving the most funding dollars were Internet, mobile/telecom, and health care.  Internet companies in the U.S. received $4.6B of funding in Q4, and that equated to 39% of all U.S. dollars for the quarter.

Outlook

Will the restraint exhibited by investors in the later part of 2016 carry over into 2017? Venture capital fundraising hit a 10-year high of $41.6B in 2016 and, therefore, there is significant cash available for startups. The question is: How will that capital be deployed in 2017 and beyond?