Source: Michael Greeley, General Partner, Flare Capital Partners
Earlier this week the National Venture Capital Association (NVCA) released its own study of “inequality” – I mean the 4Q15 fundraising statistics which showed that 46 funds totaling $5.0 billion were raised, bringing the annual total for 2015 to $28.2 billion. Quite clearly the fundraising pace over the second half of 2015 markedly slowed from the first half of the year. Notwithstanding that, 2015 was still meaningfully ahead of the 10-year trailing average of $23.4 billion, although it was modestly below the 2014 total of $31.1 billion.
There is the litany of usual suspects as to why this may be occurring: rising interest rates, China deceleration, lack of sustainable and compelling IPO activity, and general economic conditions. Standard & Poor recently announced that the outlook is worsening for 17% of the companies rated by S&P as compared to only 6% which are improving; this is the largest spread since the Great Recession. But undeniably the venture capital industry also has an “absorption” issue; that is, only so much capital can be deployed productively given the industry structure, especially in the face of inconsistent liquidity.
As of the end of 2014, the NVCA counted 1,206 Existing Funds managed by 635 Active Firms. The total assets under management (AUM) at that time was estimated to be $156 billion, of which $85 billion was managed in California, $20 billion in both New York and Massachusetts, with only $3 billion in Texas. The high water mark for AUM was $289 billion in 2006 which implies that the industry was nearly cut in half over the course of the Great Recession, plus or minus. And yet, given that contraction, there are hundreds of firms chasing after innovative market opportunities which often leads to far too many competitors in small niche, but emerging, marketplaces.
To underscore this dichotomy, some interesting jewels are buried in the 4Q15 fundraising data:
- Of the 46 funds raised, 20 were deemed “first time” managers which raised $424 million (or under 9% of the total)
- The average size fund raised was $109 million, although the median (a better barometer) was only $23 million
- The largest first time fund was $90 million
- The largest fund raised (Tiger Global) was $2.5 billion or 28x larger than the largest first timer
- The Top Five funds raised $3.7 billion (or 73% of the total)
- The Top Ten funds raised $4.3 billion (or 86% of the total)
- Fifteen funds raised less than $10 million
- The smallest fund, maybe in recorded history, was DunRobin Ventures weighing in at $50,000
And now for the rest of the story…
Unlike the amount of capital raised in 2015, the annual amount invested by VC’s increased significantly to total $58.8 billion. Interestingly 4Q15 saw $11.3 billion invested in 962 companies, which were both modestly down from 3Q15 levels, and in fact, the amount invested was the lowest in the past six quarters. There was significant investor enthusiasm directed at “tech-enabled” business models in the financial services, healthcare and consumer sectors, potentially suggesting that those companies may have an easier time raising follow-on capital once the unit economics are proven. The phenomenon of “mega” venture rounds continued in spite of a weak IPO market in the second half of 2015 as there were 74 of them in 2015.
The “funding gap” continued to widen which may be more of a reflection of definitional challenges as the boundaries blur between true early-stage venture capital investing and mutual and hedge funds investing “down market” in large mezzanine rounds of venture-backed companies, which would skew the aggregate funding data. In any event, this gap is troublesome should the amount invested decrease precipitously fast, leaving many companies stranded. Notwithstanding the possible “data integrity” complication to the analysis, there were also a number of interesting jewels in these data.
- Software accounted for $4.5 billion (40%) of all the capital invested in 4Q15; healthcare was second with $2.4 billion (21%)
- Overall, the average round size in Software was $12.2 million, eclipsed by the $15.3 million for Biotech but both were greater than the $7.7 million for the Media category – maybe a commentary on capital intensity?
- Bringing up the rear was Telecom which barely registered with only $67 million invested or less than 1.0% of the amount in 4Q15
- Cleantech saw $319 million invested in 144 companies (or $8.5 million per)
- Nearly 19% of all capital invested in 4Q15 was in “First Time” companies although these round sizes were meaningfully smaller on average at $6.8 million – maybe suggesting a “newbie” discount?
- Silicon Valley companies captured $4.3 billion, while New York Metro and New England saw $1.6 and $1.1 billion, respectively, invested; these three regions of the country accounted for 62% of all invested capital
- Interestingly, the average round size for Silicon Valley companies was $16.1 million as compared to the more frugal New England round sizes of $10.3 million
- There were 370 venture deals in California (39% of total) while only 97 (10%) and 94 (10%) in New York Metro and New England, respectively
- The Top Ten investments were all over $100 million in size and accounted for $2.2 billion in aggregate or 19% of the total amount invested in 4Q15
So, less than 1% of all companies received 19% of all dollars invested in 4Q15. Not quite as bad as mankind writ large…but troublesome nonetheless.
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