One thing is clear: the market for startup equity is on a firmer footing now than it was three months ago. With two successive quarters of growth, both in the number of deals struck and the amount of money invested, as well as a growing appetite on the part of public markets for shares in venture-backed startups, there’s reason for cautious optimism going into the second half of this year.
Using data and projections from Crunchbase, this report from Crunchbase News dives deep into the state of the global venture capital ecosystem. Here, we want to assess investment and liquidity – Money In versus Money Out.
In the Money In section, we will cover Crunchbase’s projections of how – and how much – the global venture capital ecosystem invested in Q2 2017. We’ll then evaluate how that result compares to both Q1 2017 and Q2 2016, giving us perspective on sequential quarter and year-over-year performance.
In the Money Out section, we’ll review acquisition statistics and highlight other notable liquidity events, including the thawing market for technology IPOs.
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To help you digest this report, each section will contain a bullish and bearish key finding. Without further ado, let’s dive in.
- Bullish Key Finding. Both deal and dollar volume are up across almost all stages, and round sizes continue to grow. Across most measures, the global VC market is on track to return to previous highs by the end of this year, if growth continues.
- Bearish Key Finding. Despite growth in dollar and deal volume, measures of late-stage financings suggest a return to historic highs will be slower to come. Also, very late-stage technology growth equity rounds have continued a multi-quarter downtrend.
An Overview of the Venture Capital Landscape
In the second quarter of 2017, the global venture capital industry continued the trajectory set by the first quarter, one of recovery from a slump in the second half of 2016 due to looming uncertainty.
Between concerns over ballooning and seemingly unsustainable valuations of the US’s largest private tech companies, a stopped-up tech IPO market, the contentious presidential election in the US, the referendum for the United Kingdom to leave the EU, the endless and intractable Euro crisis, and roiling financial markets in China, among other issues, it’s surprising that the global venture capital market didn’t slow down even more.
Now, for better and worse, many sources of uncertainty have come to a head, and investors have seemingly adjusted to the new normal. Q2 2017 was all about extending the gains made in the first quarter of the year.
Global Funding Activity: A View From Cruising Altitude
To provide an overview of the state of venture finance around the world, we examined the number and volume of venture deals. The scope of analysis presented in this section is broad and high-level. It includes the number and size of venture capital deals and a quick look at some of the investors who’ve led the most deals.
Pace of Dealmaking
By taking a look at the number of deals struck in this and the four previous quarters, we’re able to get a good grasp on how private-market investors felt about the previous months.
Crunchbase projects that the total number of equity funding rounds in Q2 2017 increased by roughly 5.7 percent compared to Q1, amounting to approximately 300 more rounds. This change was primarily driven by a rise in seed, angel and early-stage funding rounds.
On an annual basis, the number of funding rounds at all stages grew by a projected 8.8 percent from Q2 2016, roughly 500 more rounds, which again was driven by robust growth in deals struck with earlier-stage companies.
We’ll discuss the changes within each kind of investment in a later section.
Projected VC Dollar Volume
Here too, Crunchbase’s projections suggest that the global venture capital market is continuing its onward and upward trajectory. The total amount of capital deployed in Q2 2017 is up significantly from the local minimum of Q4 2016. That said, there are still ways to go before the market returns to the heady days of 2015 and early 2016.
Below, we’ve plotted Crunchbase’s projections for the total amount of funding in Q2 2017 and the year preceding it.
On a quarterly basis, Crunchbase projects a 16 percent increase in the total dollar volume of venture investment over the first quarter of this year. This translates to a projected $6.6 billion increase in the amount of capital deployed into startups of all stages. The gains, on a quarterly basis, are fairly evenly distributed, with angel and seed, early-stage, and late-stage startups receiving around twenty percent or more funding this quarter than in previous quarters. Only technology growth rounds saw a quarterly decline in dollar volume.
As we alluded to earlier, the global venture capital market is not quite back to recent highs. The projected $47.8 billion invested in Q2 2017 is still 7.2 percent less than the projected $51.5 billion invested in the second quarter of last year. Both early- and late-stage investment is down relative to the same period in 2016.
However, seed and technology growth categories are up 16.5 and 10.75 percent, respectively. Since both of these funding stages make up such a small proportion of the total dollar volume, it is unlikely the entire industry will reach parity with Q2 2016.
Most Active Lead Investors
We analyzed data for roughly 3,200 venture financing rounds from this quarter. This data was extracted from Crunchbase, which typically designates lead investors on a given deal. Based on the set of rounds for which lead investors are listed, we then summarized that data by the count of those lead investors. In total, we identified over 1,250 separate investors that led one or more rounds this quarter.
In the chart below, you can find a list of the most active lead investors, globally, across all stages. Note that these rankings are likely to shift as more data comes in.
In this quarter, it appears as though there was a significant uptick in round leadership by some of the biggest investors in the business. For example, in our Q1 report, we found that Accel Partners, Sequoia Capital, and Tencent Holdings tied for first place in the rankings, each having led nine rounds. This quarter, however, Accel led 20 rounds, whereas Sequoia and Tencent led 14 and 11 rounds, respectively.
This quarter’s lead investor leaderboard has some new additions, such as General Catalyst, which led rounds in Grammarly and Samsara, among others. Softbank makes its first appearance on this list as well; in the past quarter, the Japanese conglomerate led cybersecurity firm Cybereason’s Series D and UK-based Improbable’s improbably large $502 million Series B round, among others. Another first-timer is True Ventures, which alongside Kleiner Perkins, Fidelity Investments and Wellington Management co-led the $325 million Series E round which peddled Peloton onto the unicorn list.
This being said, apart from some unexpected newcomers and a sudden drop-off in round leadership by others, the majority of the firms on this list represent “the usual suspects.” Most are stalwarts of the industry with a long track record of success and billions of dollars under management.
Now that we’ve explored this quarter’s global funding landscape from a macro perspective, it’s time to dial in on the specifics of each stage.
Stage-By-Stage Analysis of Q2 VC Funding Trends
The following charts show the average size of various rounds at different stages of the fundraising cycle. These metrics serve as helpful points of comparison when looking at rounds closed during this and future quarters.
We’ll start “close to the metal” with seed and angel financings and work our way up the stack to large technology growth rounds.
Angel and Seed-Stage Deals
With rare exception, incipient companies don’t tend to raise a lot of money. This is true both for individual companies and the asset class as a whole. Although Crunchbase projects that in Q2 just over 60 percent of the investment deals were struck by seed and angel investors, they accounted for roughly 4.6 percent of the total dollar volume.
Below, we’ve included a chart that shows the number of deals and the amount of money invested in seed and angel deals.
On a quarterly basis, both dollar and deal volume are up, albeit by varying degrees. Projections from Crunchbase indicated that, globally, deal volume is up by roughly three percent, resulting in a hundred more companies receiving funding this quarter versus last quarter. Although the quarterly gains in the number of seed and angel rounds are fairly modest, the projected increase in dollar volume is anything but. Crunchbase’s projections point to a 23 percent rise, since last quarter, in the amount of money investors committed to very young companies, a change of around $400 million.
The total amount of capital invested is only part of the money side of the story. The following chart shows growth in both mean and median round sizes. Unlike the projected data above, which tries to account for rounds that likely occurred but haven’t yet been announced, the data presented below is based only on rounds that have been already recorded.
It’s clear that the size of seed and angel rounds is on the rise. The average round grew by 44 percent relative to Q1 2016 and the median round is a more noteworthy 75 percent larger than the median round from the previous quarter. The change since last year is even more remarkable considering that the average round is 62.5 percent larger, and the median is again 75 percent larger, than those closed during the same period last year.
Let’s take a look at the investors that have been involved in the most angel and seed deals last quarter.
Just like last quarter, it should come as no surprise that many of the most active seed and angel-stage investors are accelerator programs. After all, these organizations are in the business of providing small amounts of capital to a relatively large number of fledgling companies. It’s likely that some of these numbers will change as more rounds from this quarter are added to the historical data. However, unless one or more investors have made dozens of investments this quarter and managed to keep them all under the radar, this list still holds up.
(Note: due to a quirk in how Crunchbase classifies the “Angel-Seed” category, Crowdcube, an equity crowdfunding platform, is included in this list.)
Moving right along, the following table lists a number of notable seed and angel investment rounds closed in Q2 from around the world.
Early-stage investments – mostly comprised of Series A and Series B rounds – are where things start to get interesting. The overwhelming majority of participants in these rounds are institutional investors, and considering that these deals make up a projected 30 percent of rounds and 35 percent of total dollar volume in Q2, this data will likely provide us with a better understanding of investor sentiment this quarter.
Below you’ll find a chart showing projected deal and dollar volume for this quarter and the year leading up to it.
As with seed and angel rounds, both deal and dollar volume grew relative to Q1 2017, but again to varying degrees. Roughly 150 more early-stage deals were closed in Q2 relative to Q1, an increase of nearly 9 percent. These same projections show a notable 23 percent increase in the amount of capital invested, good for a $3.2 billion uptick in early-stage dollar volume globally. (Recall that dollar volume in seed and angel rounds was also up by 23 percent, quarter-over-quarter.)
Looking at things on an annual basis suggests that this is an industry that’s still on the mend. The dollar volume of early-stage deals in Q2 2017 is still roughly $3.2 billion, nearly 16 percent, lower than the Q2 ‘16 water mark. However, the number of early-stage deals from Q2 2017 was up 6 percent relative to last year, so that’s one bright spot.
Again with the theme of recovery and a return to sustained growth, we’ve charted the mean and median size of reported rounds going back to Q2 2016.
Both median and average round sizes have grown over the past quarter. The average early stage round is now $11.9 million, a 14.4 percent increase over the previous quarter. The median round, coming in at $6 million on the nose, is up 11 percent from Q1 2017.
Looking at it from an annual perspective, though, Q2 2017 is something of a mixed bag. Although the median early-stage round is 20 percent larger than first three months of 2016, the average round is still nearly 12 percent smaller. This being said, since median round sizes have consistently crept higher over time and the average size of an early-stage round is on an upward trajectory, it’s entirely possible that, by the end of this quarter, these metrics will be back to where they were before the dip of late 2016.
Of course, these metrics reflect the decisions of thousands of people, but some investors are more involved in the market than others. We identified the investors in nearly 1,300 early-stage rounds closed in Q2 and found over 2,200 unique individual and institutional investors. Out of those, here are the busiest early-stage investors from Q2.
Again we see many of the investors we’d expect to find here. A preliminary analysis suggests that some of the most prolific investors picked up their pace of deal-making in Q2. For example, in Q1’s report, Accel Partners was reported to have invested in 11 early stage venture rounds. But according to current data for Q2, that firm has doubled the number of rounds in which it’s invested. This also holds true for NEA and GV (formerly known as Google Ventures), which invested in roughly twice the number of early-stage rounds as the previous quarter. Whether this is a seasonal phenomenon or not is unclear.
And here are some of the early-stage financing events that caught our eye in the last quarter.
And with seed, angel, and early-stage investments covered, it’s finally on to the latter end of the venture fundraising spectrum.
Like with early-stage deals, investment activity in late stage deals – which are primarily Series C, Series D, and beyond – indicates a continued, sustained recovery from the low point of Q4 2016. In the case of these late-stage deals, we’re able to assess an even larger chunk of the global VC market. In Q2 2017 late-stage deals accounted for over 56 percent of the total dollar volume, despite being just under seven percent of the total number of deals.
Below, you can find a chart displaying late-stage dollar and deal volume according to Crunchbase’s projections.
It’s remarkable how similar this chart looks to the one showing early-stage deal data. Just like rounds from the previous stages we analyzed, both the number and dollar volume of late-stage venture capital deals are on the rise, at least relative to the last couple of quarters.
There were roughly twelve percent more late-stage deals struck in the second quarter of 2017 relative to the first. Dollar volume is also up on a quarterly basis. Projections indicate that over 19 percent more money was invested in Q2 versus the first quarter of this year, meaning that late-stage startups around the world received roughly $4.35 billion more in investment than they did in Q1.
Comparing this quarter to the second quarter of last year again shows mixed results. Like with early-stage VC, deal volume is up, but dollar volume is down. Relative to Q2 2016, projections indicate there were 9 percent more late-stage deals. However, there was roughly 4 percent less capital committed overall. Despite this, if the kind of robust quarter-over-quarter growth we’ve seen recently continues through Q3, the market will be left in better standing than the beginning of 2016.
Now let’s take a look at the internals of the late-stage VC market.
Median round size is unchanged since last quarter (and, for that matter, the previous three) and the average round size is up a comparatively modest 3.5 percent from Q1 2017. Again echoing a common theme, the median late-stage round from Q2 2017 is twenty percent larger than one from Q2 2016. However, the average late-stage round is nearly 14 percent smaller than last year’s average. But it’s worth noting that the Q2 2016 data point appears to be a statistical outlier, perhaps caused by one or more giant late-stage rounds which Crunchbase didn’t classify as “technology growth equity.”
The average round size in Q1 2016 was $54.9 million and the average in Q3 2016 was $64 million, so it’s likely that some number of very large rounds skewed Q2 2016’s average much higher than the historical norm. Meanwhile, many of the most prolific late-stage investors from Q2 are also some of the most established firms in the business.
And among the various late-stage deals, here are some of the ones that grabbed our attention from this quarter.
We’re almost done with the sector-by-sector analysis. On to the final stage: technology growth.
Technology growth capital is often referred to as “growth equity” in the business. Crunchbase categorizes technology growth rounds as the set of private equity rounds which also saw participation from traditional venture capital investors, often as a follow-on from previous VC rounds.
The chart below shows Crunchbase’s projections for deal and dollar volume in technology growth rounds.
Compared to the same period last year, both deal and dollar volume are up. Crunchbase projects that there were a dozen more deals struck in Q2 2017 compared to Q2 2016, a nearly 32 percent increase. Dollar volume is up too, albeit by a more moderate 10.75 percent, which amounts to around $160 million.
There’s an interesting disconnect between dollar and deal volume, which is particularly apparent when you compare Q2 to Q1 of this year. Although Cruncbase projects that there were over twice as many technology growth equity deals made in Q2 than Q1, the total amount of funding represented by these deals is 45 percent less than the previous quarter. The cause of this decline in dollar volume is likely significant declines in round sizes over time.
Below, you will find a chart displaying the median and average technology growth round over time.
The average size of technology growth equity rounds extended its decline from its high in Q4 2016, and the median round size is down as well. Both measures are down 65 percent or more relative to Q1 2017. Compared to Q2 last year, the average growth equity round is nearly 23 percent larger, and the median is up by 11 percent.
- Bullish Key Finding. Q2 saw a number of successful tech IPOs, quelling fears that public market investors have lost their appetite for new tech stocks.
- Bearish Key Finding. Despite a handful of high-profile acquisitions, venture-backed M&A saw one of its worst quarters in years, at least in terms of total dollar volume.
Acquisitions are one of two main ways venture capitalists and other private investors can liquidate their stock in the companies they fund.
Below, you’ll find a chart which shows venture-backed startup acquisitions over time.
This chart is somewhat deceiving, especially if you were to only compare the relative level of M&A activity in Q2 2017 to Q2 and Q3 of 2016. Although it’s true that there were close to 15% fewer deals and a nearly 80% decline in dollar volume between Q2 2016 and Q2 2017, these quarters appear to be outliers, a point we also brought up in last quarter’s report.
It turns out that the middle quarters of 2016 were particularly prodigious for big tech M&A deal-making. There were a number of major acquisitions that pushed global M&A dollar volume much higher:
- Didi Chuxing acquired Uber China for $7 billion
- Walmart acquired Jet.com for $3 billion
- Unilever acquired Dollar Shave Club for $1 billion
M&A exits for venture-backed startups weren’t necessarily more plentiful – in fact, there’s been a slight but consistent downtrend in the number of deals over the past year – but they were certainly more lucrative.
All this being said, Q2 2017 was disappointing even relative to Q4 2016, which as we’ve mentioned was the nadir of venture capital investment. Dollar volume declined over 66 percent, and the number of deals declined by 6.5 percent relative to the previous quarter. Although there were some notable exits, it’s nonetheless been a rather sleepy quarter.
Below, we’ve broken out a number of notable M&A transactions from Q2 2017.
Q2 saw a lot of consolidation in a number of industries, most notably shopping and transportation. June 16th was a fortuitous day for M&A in retail. Bonobos, the online menswear retailer, announced its sale to Walmart for over $300 million, a solid exit for its investors, which included Accel Partners, Lightspeed Venture Partners, and Nordstrom. However, that announcement was overshadowed by Amazon’s acquisition of Whole Foods for $13.7 billion, news of which broke on the same day as the Bonobos sale.
On the transportation front, KKR, the large private equity firm, acquired Dutch parking company Q-Park in a multi-billion dollar deal. And Gett, the NYC-based ridesharing company aspiring to usurp Uber and Lyft, acquired its competitor, Juno, for $200 million.
As we alluded to above, M&A isn’t the only route to liquidity for investors, founders, and employees. Let’s take a look at the quarter’s global IPO performance.
Initial Public Offerings
Q2 2017 saw a noticeable uptick in technology IPOs in both the US and Europe, helping to quiet speculation that the “IPO window” was closed to all but the biggest companies.
Here, we broke out a number of deals from around the world that mattered most.
For now, there haven’t been many announcements or regulatory filings for IPOs in Q3. For now, there’s only one venture-backed tech company which has announced a forthcoming offering: Seattle-based real estate search and brokerage Redfin, which filed paperwork with the SEC declaring its intention to raise $100 million. To date, Redfin has raised over $167 million from investors ranging from Paul Allen’s Vulcan Capital, Draper Fisher Jurvetson, Tiger Global Management, and others.
Although the global venture capital market is still recovering from a significant dip at the end of last year, Q2 2017 was, in general, a fairly good quarter. There’s been growth in deal and dollar volume at almost all stages, except for technology growth equity, for the second consecutive quarter. Rounds are growing in size, some of the most active VCs we highlighted in Q1 have literally doubled down on their investing activity, and, importantly, the total amount of venture capital funding is within reach of pre-dip levels. If the general upward trend continues, Q3 will shape up to be a real return to normal, not just another quarter of recovery.
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 with participation from venture investors.
Illustration: Li-Anne Dias