Fat Lady is Clearing Her Throat…

Ouch. That was a slap in the face. I get that this past quarter included the languid summer months and that the stock market volatility was quite distracting, but the 3Q15 venture fundraising data caught many flat-footed. This past quarter saw only $4.4 billion of capital raised by 53 new funds, which is a 59% and 35% decrease from the prior quarter, respectively. And this is against a backdrop when venture capitalists invested $16.3 billion in 1,070 companies during that same quarter.

Before I point out some of the nuggets buried in the data, there were a series of fascinating announcements by three of the leading accelerators/incubators over the past few months which highlight a new phenomenon in the venture marketplace: Y Combinator, AngelList and Techstars all raised large institutional funds ($700, $400 and $150 million, respectively), proving that sitting at the turnstile of extraordinary and proprietary deal flow is a very valuable and coveted position – one that is easily “monetizable.” These developments also underscore that many large institutional investors are still clambering to invest in the earliest stages of the innovation economy (the AngelList platform will now support $400 million from China’s third-largest private equity firm, China Science & Merchants Investment Management Group, which has $12 billion under management).

One of the hallmarks of the venture capital industry over many cycles is its remarkable ability to re-invent itself. Arguably these three new funds above represent $1.25 billion of capital that otherwise would have been invested by traditional venture firms. New firms often are created by partners leaving established firms which is why the National Venture Capital Association (NVCA) so closely tracks “first time” funds. In 3Q15, 13 of the 53 funds raised were deemed “first time” funds and collectively, they raised $737 million or 17% of the total. On the face of it that is not too bad until one realizes that the largest “first time” fund was $460 million (congrats to my friends at Silversmith Capital) or nearly two-thirds of the total. Stripping out Silversmith, the average size of the remaining dozen “first time” funds was $23 million.

Other gems in the data:

  • Top 5 funds raised totaled $1.9 billion or 43% of the total
  • Top 10 funds captured $2.8 billion or 65% of the total – concentration continues unabated
  • Only 16 of the 53 funds were greater than $100 million.
  • And with great symmetry, 16 of the 53 million funds were less than $10 million in size
  • The median fund size was $39 million – the VC industry continues to be characterized by a handful of very large funds tethered to a myriad of small focused funds.
  • While California, Massachusetts and New York funds captured 81% of the total dollars raised, 19 other states housed new funds – reasonably good geographic diversity
  • My favorite nugget – the Bottom 10 funds raised $26 million or 0.6% of the total. Now that is a real slap in the face – one that leaves a mark.

The real question now is what trajectory is the VC industry on: if one were to annualize the year-to-date amount raised for one more quarter, the 2015 total raised would come in around $30 billion (which is sharply down from mid-year estimates of $40 billion). But if one were to simply annualize 3Q15 performance, the VC industry is on pace to raise only $17.5 billion. It certainly feels that, absent a more robust and predictable IPO market, the venture industry is now at risk of shrinking again as capital either sits on the sidelines or looks for non-traditional access points.

Through 3Q15 there have been only 51 venture-backed IPO’s and those have raised just over $5 billion in proceeds, which is tracking well below the 2014 amount of $9.3 billion for the full year. The M&A market year-to-date for venture-backed companies is also soft with only $40 billion of transactions versus over $80 billion for all of 2014, which was a high watermark over the last 5 years. Presumably, greater liquidity will result in an improved fundraising environment as investors see a return on all that invested capital. Hopefully that will happen before the Fat Lady hits the high notes.


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2 responses to “Fat Lady is Clearing Her Throat…

  1. Pingback: Y Combinator, AngelList, Techstars Shake Up VC World With Big Funds | Xconomy

  2. Pingback: Press Today » Wall Street is cashing in on Silicon Valley’s biggest problem

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