Data Venture

Q1 2018 Global Investment Report: Late-Stage Deal-Making Pushes Worldwide VC To New Heights

The first quarter of 2018 came in roaring for the tech industry but ended up a little rough around the edges.

As the U.S. president does battle with Amazon, social networks’ privacy policies come under greater public scrutiny, dreams of fully-autonomous electric cars collide with technical limitations, and a cold trade war that grew hotter by the tweet, it’d be easy to think that Q1 2018 was, at best, so-so. And for many big tech companies, particularly those trading on public markets, that’d be a fair assessment.

But the global venture capital market seemed to pay no heed to the choppy waters downstream. According to projected data from Crunchbase, global venture capital deal and dollar volume in Q1 2018 eclipsed previous highs from Q3 2017, setting fresh quarterly records for post-Dot Com startup investment.

Like in previous quarters, we at Crunchbase News venture into a cavern of data from the first quarter. Here, we’ll focus primarily on investment into startups. But, fear not, we’ll follow up shortly with our analysis of startup liquidity in Q1.

Before diving in, here are two key takeaways to keep in mind.

  • Bullish Key Finding: In terms of total venture dollar and deal volume, Q1 2018 sets fresh post-Dot Com Bubble records for investment worldwide
  • Bearish Key Finding: Late-stage funding, in terms of both deal and dollar volume, appears to be growing faster than seed and early-stage deals, prompting questions about future deal pipeline issues.

Without further ado, let’s figure out what happened in the world of VC during the first quarter of the new year.

Global Funding Activity: A View From Cruising Altitude

Around the globe, venture capitalists kicked off 2018 where 2017 left off: by setting new records.

In this section, we’re taking a look at the global venture capital market from a relatively high vantage point. We’re going to evaluate some key metrics for the market overall – including the overall size and quantity of venture deals – before digging into the stage-by-stage numbers in the next major section.

Pace of Dealmaking

By taking a look into the recent past, we’re able to see how last quarter stacks up compared to the past year. And, apart from the Q4 hiccup from last year, the trend is generally upward.

The chart below plots projected data from Crunchbase for venture dollar volume in Q1 2018 in addition to the previous four quarters. (For more information about Crunchbase’s projections and methodology, see the Methodology section at the end of this report.)

On both a sequential quarterly and year-over-year basis, global venture deal volume is up. With an overall quarter-on-quarter expansion of over twelve percent, the market made up for ground lost in Q4.

As we’ll see in our stage-by-stage analysis shortly, most of those gains in deal volume were driven by growth at two different ends of the funding spectrum. Some of the most impressive gains, from a percentage perspective, came from late-stage deals which pushed total dollar volume higher. However, since angel and seed-stage deals make up such a large proportion of overall deal volume, a rising tide there raises numbers for the whole market.

Projected VC Dollar Volume

Overall venture capital dollar volume follows a similar pattern, except instead of angel and seed-stage deals pushing the new, record highs, it’s a jump in late-stage funding that pushed the overall metric to a local maximum. In other words, since late-stage deals account for the lion’s share of global dollar volume, growth (or contraction) there drives the numbers for the market overall.

The chart below shows Crunchbase’s projections for venture dollar volume, subdivided by funding stage.

On both a quarterly and year-over-year basis, venture dollar volume is up at stages but “technology growth” since last quarter. Q1 2018 delivered one of the largest percentage-based jumps in dollar volume in recent memory. And with a projected total of nearly $77 billion worth of venture deals last quarter, dollar volume was over twice that of the same quarter last year.

And just for some added perspective of just how big $77 billion in quarterly investment is, at least in relative terms, Crunchbase’s projections show that there was about $150 billion invested around the world in all of 2015.

Most Active Lead Investors

Now that we’ve explored the contours of the global startup funding market for last quarter, let’s take a look at who’s leading the charge. In venture, leadership is an important skill for many reasons, not least of which is the ability to source deals and organize funding rounds.

In some, but not all rounds with investors attached, Crunchbase designates which investor led the round. And based on an analysis of reported data for 4,951 venture funding rounds from the last quarter, we identified around 1,940 distinct investors – both individual and institutional – that led at least one round in Q1. The chart below shows some of the most prolific round-leading investors in the market last quarter.

The ballooning size of YC’s seasonal batches aside, the makeup of this list is more or less in line with two broad groups you’d expect to see:

  • Lots of established venture funds like Sequoia Capital and New Enterprise Associates (NEA).
  • Some corporate venture investors like GV (formerly Google Ventures, which Crunchbase News profiled in mid-January), Tencent Holdings, Alibaba Group, and SoftBank.

But there are a few investors which stand out from the rest in this ranking, both with interesting angles into the venture space:

It should go without saying that there is a very long tail on this chart (again, nearly 2,000 investors total) and is subject to change as more deals from Q1 are added to Crunchbase over time. Regardless, what makes the top here—and just below the threshold for making it to the chart—are mostly just the usual suspects.

Now let’s see what’s going on within each stage.

Stage-By-Stage Analysis of Q1 2018 VC Funding Trends

Earlier we promised a section where we’ll go over some of the global VC market’s internals in greater depth. Well, congrats, we made it here together.

There’s a lot of data to cover in this section, so we’ll try to move fairly quickly.

As we’ve done in previous quarters, we’ll start fairly “close to the metal” by analyzing angel and seed-stage deals, and move on to later stages from there.

Angel And Seed-Stage Deals

The first check of outside funding is among the most difficult a startup will raise. Q1 2018 appears to be another banner quarter for angel and seed-stage deals. In Crunchbase, this is mostly comprised of angel and seed rounds, smaller convertible notes, and equity crowdfunding rounds.

The chart below shows projected deal and dollar volume for angel and seed-stage deals in Q1 2018 and a prior year’s worth of quarterly data.

Projected angel and seed-stage investments make up 58 percent of the total deal volume in Q1 2018 but just four percent of the total dollar volume of venture investment. On both a sequential quarterly and annual basis, both metrics are up, with dollar volume leading the way.

That’s due in no small part to a rise in funding round size over the past year leading up to Q1. Below you’ll find a chart revealing an uptick in reported average and median round size of angel and seed-stage deals over time.

Here too, both metrics are either flat or positive both quarter-on-quarter and year-over-year. As we’ll see throughout the remaining funding stages, this is something of a common thread.

And who were some of the most active investors in Q1? From reported rounds data for the quarter, we identified 1,856 unique individual and institutional investors connected to angel and seed-stage deals, worldwide. The top-ranked startup backers are displayed in the chart below.

It should come as no surprises that the most active investors in angel and seed-stage deals are, for the most part, accelerator programs and dedicated seed funds.

A few groups stand out:

  • Y Combinator’s seasonal batch size grew to 141 companies (135 of which can be found in this Crunchbase List), it’s easy to see how the program is head-and-shoulders above others in terms of deals struck.
  • Hiventures is a state-owned venture capital firm based in Hungary. It has €182.3 million under managementand offers a full raft of funding options, ranging from an accelerator program to growth equity, to Hungarian entrepreneurs.
  • Crunchbase News mentioned TEDCO in its coverage of the American South’s most active investors. TEDCO is a fund sponsored by the state of Maryland and is focused to funding new ventures that commercialize intellectual property developed in the state’s research universities.

Early-Stage Deals

It’s at the early stage of the funding cycle (primarily Series A, Series B, and certain large convertible notes and equity crowdfunding rounds) when we start talking about real money. With 33 percent of global deal volume and 32 percent of the total dollar volume, ebbs and flows in early-stage deal-making can make a serious impact on the market overall.

And considering that many of the companies raising early-stage deals today could go on to raise late-stage deals in the future, a close look at this stage gives a peek at future deal flow.

To see how early-stage funding in Q1 stacks up against the last year, see the chart plotting projected deal and dollar volume below.

Relative to both Q4 2017 and Q1 2017, early-stage deal and dollar volume are up markedly. Nearly twice as much capital was invested in early-stage deals in Q1 2018, relative to the same period last year. And while the number of deals is also up year-on-year, dollar volume grew faster and thus continues to push the average size of early-stage rounds higher.

Below, you’ll find a chart of average and median early-stage rounds – based on reported data in Crunchbase – in Q1 2018 and the four prior quarters.

Early-stage rounds around the world were larger in Q1 2018 than the prior quarter and last year. Because the median figure is on the rise, it’s likely we’re seeing a population-wide trend here; in other words, it’s not just a few very large rounds skewing the average upward.

Despite rising average check size, plenty of investors continue to pump lots of capital into early-stage deals. In the chart below, we plot the most active among them.

We find that primarily U.S.-focused venture firms are in the minority among the most active early-stage investors.

There’s nothing much interesting to report on in the above ranking, as the funds included are about what you’d expect to see. That said, there is one tidbit to keep in mind. Five of the eleven firms listed in this chart have a direct connection to China:

  1. Matrix Partners China
  2. IDG Capital Partners
  3. Tencent Holdings
  4. Shunwei Capital
  5. GGV Capital

Once we account for the Business Growth Fund, an active investor in U.K. startups, we find that primarily U.S.-focused venture firms are in the minority of this particular ranking.

Late-Stage Deals

All the companies that didn’t fail, sell out, or just stop raising capital after Series B graduate to late-stage ventures. In Q1 2018, late-stage deals (mostly Series C, Series D, and beyond) accounted for just eight percent of total deal volume but a whopping sixty percent of the dollar volume, giving this stage of deals a lot of sway over aggregate dollar figures for the quarter.

In the chart below, we’ve plotted Crunchbase projections for total late-stage deal action for Q1 and the prior year.

Late-stage deal and dollar volume are definitely on the rise, with fairly consistent quarterly growth over the last year or so, with the exception of a single quarterly decline in deal volume between Q3 2017 and Q4. Growth of late-stage dollar volume – both raw figures and on a percentage basis – and deal volume (just on a percentage basis) outpaced all earlier stages quarterly and year-on-year.

To get an idea of what might be driving dollar volume growth, let’s see how the size of late-stage rounds have changed, globally, over the past five quarters.

Despite some modest growth in median round size over time, the average is growing much faster. So while Q1 2018’s late-stage deals, as a population, may be slightly larger than the same time a year ago, it’s likely that a few very large rounds per quarter are skewing averages higher, faster.

Q1 has plenty of examples of really, really big late-stage rounds. Here are just a few:

And here are the firms which invested in the most late-stage deals in the last quarter.

It’s not #BreakingNews that established, generally well-regarded venture firms with lots of capital under management tend to invest in a lot of late-stage deals, either as de novo positions or by exercising follow-on rights.

What is worth noting, though, is that many of the firms listed above are participants in the Q1 trend of announcing or launching really, really, big new funds. Here’s just a sample from the chart above:

And it’s possible that other firms on this list will be raising new funds later this year. (Andreessen Horowitz, for example, has historically raised a new $900 million-$1 billion fund every two years since 2012. The firm’s last publicly-disclosed fund – its fifth, just a hair under $1 billion – was closed in June 2016.)

Technology Growth Deals

As a category of funding rounds, “technology growth” is a bit of a strange one. The idea here is to capture super-late-stage funding deals, typically struck with companies headed toward going public.

Longtime readers of Crunchbase News’s quarterly reports may remember that this category presented some vexing challenges over time, particularly concerning definitions.

For our Q1, Q2, and Q3 reports for 2017, technology growth rounds were defined as “any ‘private equity’ round in which a ‘venture’ investor also participated.” This didn’t work for a few reasons, chief among them being that many of these rounds have only one investor, a private equity fund.

Starting in Q4 2017, and here for Q1 2018, technology growth deals are defined, in plain English, as “any ‘private equity’ round raised by a company that has previously raised ‘venture’ financing in a prior round, such as a seed round or Series C.” By focusing on the company’s funding history, rather than how its investors are labeled, the News team believes it’s capturing a more accurate picture of growth equity investments by PE firms in technology companies.

Just like in prior quarters, deal and dollar volume for tech growth rounds are kind of all over the place, as the chart below shows.

For reasons we’ll discuss shortly, we believe it’s best to focus on deal volume inside of this category. For technology growth deals, there’s been positive growth since last quarter and the same time last year. This signals continued investor interest in very late-stage private companies, which is matched by companies interest in raising from private markets.

This being said, there hasn’t been much change in the size of tech growth rounds overall, apart from some outliers that push the average up. The chart below shows average and median round size of tech growth deals.

First off, the size of technology growth deals is quite variable. As examples:

With much more variability in round size just within the past quarter, it’s difficult to make any definitive claims about the state of tech growth funding in the last quarter. It might be back to the drawing board here.

And with that, we’ve covered the world of startup capital inflows in the first quarter of the year, at least in broad strokes.

Conclusions From Q1 2018

On a global scale, the venture capital market in Q1 is a microcosm of a number of salient trends.

  • Big Rounds Reign – Rounds are getting larger at basically every stage. And, importantly, the largest rounds are growing larger, faster, across the board. Crunchbase News, independent analysts like Ian Hathaway, and VCs like Seth Levine from Foundry Group have covered this phenomenon in the past quarter. And barring something unexpected, there’s no external force in sight to slow this trend down.
  • Concentration Of Growth At The Top – In terms of both raw numbers and on a percentage basis, some of the fastest growth has been at the latter stages of the startup funding cycle. At a global scale, this hasn’t come with material declines in seed or early-stage deals, like it has in North America. But nonetheless, there’s a very real possibility that high-dollar deals with comparatively less-risky late-stage companies will draw more attention from investors over upstream opportunities.
  • US Funds Are Getting Larger – American venture capital firms have raises some very, very large funds in the past quarter. This may be a response to foreign competition from the likes of SoftBank and large corporate VCs in China, or it may just be an effort to anticipate capital requirements to maintain positions in their portfolio companies. If companies are staying private longer, pro rata investment opportunities follow on, and on, and on. Regardless, this results in more dry powder investors will have to marshal carefully, lest valuations go up in smoke due to unrealistic expectations.
  • There’s A Truly Staggering Amount Of Money Sloshing About – As a follow-up point to the above, the first quarter of 2018 highlighted a trend from the prior year: the private market grows in importance as a venue for fundraising. A recent  Wall Street Journal analysis suggests that, at least in the US, companies raised more through private capital investment than by raising in public markets. Between rising round sizes, more capital flowing into bigger funds, extended timelines for going public, 2018 will likely be no different if Q1’s momentum keeps up.

Some may take solace in the fact that much of this is just an acceleration of historic trends. But at the same time, there are very few mechanisms to point to which can slow this train down, and investors don’t seem keen on pumping the brakes. After all, things are just now picking up from a sluggish Q4. So much for taking an extended breather.

Methodology

The data contained in this report comes directly from Crunchbase, and in two varieties: projected data and reported data.

Crunchbase uses projections for global and U.S. trend analysis. Projections are based on historical patterns in late reporting, which are most pronounced at the earliest stages of venture activity. Using projected data helps prevent undercounting or reporting skewed trends that only correct over time. All projected values are noted accordingly.

Certain metrics, like mean and median reported round sizes, were generated using only reported data. Unlike with projected data, Crunchbase calculates these kinds of metrics based only on the data it currently has. Just like with projected data, reported data will be properly indicated.

Please note that all funding values are given in U.S. dollars unless otherwise noted. Crunchbase converts foreign currencies to US dollars at the prevailing spot rate from the date funding rounds, acquisitions, IPOs, and other financial events as reported. Even if those events were added to Crunchbase long after the event was announced, foreign currency transactions are converted at the historic spot price.

Glossary of Funding Terms

  • Seed/Angel include financings that are classified as a seed or angel, including accelerator fundings and equity crowdfunding below $5 million.
  • Early stage venture include financings that are classified as a Series A or B, venture rounds without a designated series that are below $15M, and equity crowdfunding above $5 million.
  • Late stage venture include financings that are classified as a Series C+ and venture rounds greater than $15M.
  • Technology Growth include private equity investments in companies that have previously raised venture capital rounds.

Illustration: Li-Anne Dias