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.

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In the Money In section, we will cover Crunchbase’s projections of how—and how much—the global venture capital ecosystem invested in Q3 2019. We’ll then evaluate how that result compares to both Q2 2019 and Q3 2018, 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.

To help you digest this report, each section will contain a bullish and bearish key finding. Without further ado, let’s dive in.

Money In

• Bullish key finding: Venture capital deal volume hit an all-time high, according to Crunchbase projections. This growth was largely driven by a large uptick in seed-stage deals, as well as ongoing development and maturation of international startup markets.
• Bearish key finding: Continued declines in China’s VC market led to a plateau in VC dollar volume growth worldwide. Additionally, projections indicate declines in early-stage deal volume, which may presage problems for later-stage investors years down the road.

Global Funding Activity: A View From Cruising Altitude

Crunchbase projects that, worldwide, $75.6 billion was invested across 9,100 venture capital deals in Q3 2019.

Spurred by a spurt of seed-stage activity, worldwide venture deal volume is projected to reach new post-Dot Com heights. However, venture dollar volume, which has been primarily driven by very large, very late-stage rounds, remains below all-time highs (a projected $87.4 billion in Q2 2018) and appears to have flattened out over the past several quarters as the most cash-hungry unicorns graduate to public markets.

The number of venture deals and the total dollar amount invested in those deals are very different numbers. You can think of deal volume as the velocity of the global venture market. And, similarly, you can think of dollars invested as the weight of those global venture deals.

Deal volume is growing faster outside North America. In Q3 2019, U.S. and Canadian companies netted 39.2 percent of venture deal volume across all stages, according to Crunchbase data and projections. That’s compared to 43 percent in Q3 2018. Although the shift is small, it results from a fairly consistent trend.

In this respect, the center of venture capital gravity is shifting away from the U.S. and Canada. However, with respect to dollar volume, North American companies are gaining ground. North American startups raised 47.8 percent of worldwide venture dollar volume in Q3 2019, up markedly from the 43 percent proportional share U.S. and Canadian startups called down in Q3 2018.

The principal driver of this trend is the ongoing decline of China’s venture capital market, mirroring deteriorating economic conditions in that country. Regardless of the cause, the United States and Canada are taking on a greater share of global venture dollars, even as their deal share slips.

China’s diminished position in the global VC market is highlighted in Crunchbase News’s recent analysis of what we call “supergiant rounds.” These VC deals of $100 million or more account for 45.1 percent of known venture dollar volume transacted in 2019. Supergiant deals, almost by definition, have an outsized influence on dollar volume totals, and when a country’s share of supergiant rounds declines, so does its contribution to the market as a whole. Crunchbase News found that, in Q3 2019, Chinese startups raised 20 supergiant rounds according to Crunchbase data, down from a high of 50 such deals in Q3 2018.

With this high-level overview out of the way, let’s dig into some more of the headline numbers.

Pace of Dealmaking

Crunchbase projects that global venture deal volume hit a new all-time high in Q3 2019.

Global venture deal volume grew by over 9.3 percent from last quarter, the largest projected quarter-over-quarter growth rate in over a year. Relative to the same quarter in 2018, global deal volume is up nearly 9.9 percent.

Deal volume growth is a global phenomenon. North America accounted for approximately 39.1 percent of total projected deal volume last quarter, down slightly from 43 percent of total deal volume in Q3 2018.

Projected VC Dollar Volume

Crunchbase projects that dollar volume is basically flat, and only slightly higher, compared to the sequentially preceding quarter. This being said, dollar volume is down on an annual basis. Crunchbase data projects a $2.8 billion gap in overall funding between Q3 2019 and Q3 2018.

However, as we’ve seen in the past, part of this gap is attributable to outsized rounds, which, as outliers, can skew the numbers by a significant margin. For example, the top ten largest startup funding rounds of Q3 2018—including a CN¥13 billion Series B deal closed by JD Digits, a CN¥10 billion “Series A” closed by Chinese state-backed media company CMC Inc, and $1 billion funding rounds raised by the likes of SenseTime, OYO, Grab, and Lucid Motors—raised over $10.2 billion collectively.

By comparison, the ten largest rounds from the past quarter netted those companies about $7.3 billion in venture funding. Apart from funding rounds raised by Argo AI and Absaroka Energy, there were no other rounds of $1 billion or more, compared to six in Q3 2018.

The decline in dollar volume can be in part attributed to the change in the size of the largest rounds recorded in the quarter, compared to its year-ago counterpart.

Most Active Lead Investors

In the case of most venture deals, there’s a “lead” investor. Typically, lead investors initiate and run due diligence, syndicate the deal to other firms, and usually write the biggest check of the round. Lead investors often take seats on the company’s board of directors, where they can exert governance and control functions necessary to ensure the best financial outcome for their limited partners.

Crunchbase’s funding round data typically lists the set of investors involved in a given venture deal. It usually (though not always) specifies which among the listed investors led the round. In the chart below, we chart the investors which participated in the most early- and late-stage deals in Q3 2019. Keep in mind that these counts are subject to change as additional funding round data is added to Crunchbase over time.

Stage-By-Stage Analysis of Q3 2019 VC Funding Trends

In this section, we’ll start close to the entrepreneurial metal by looking at seed-stage deals. From there we’ll climb our way up the capital stack, skittering across the alphabet soup of Series As, Series Bs, Series Cs, etc., from seed to very late-stage venture.

Angel And Seed-Stage Deals

Q3 2019 brought a veritable explosion in angel and seed-stage dealing.

Crunchbase projects that $4.44 billion was invested across 5,875 angel and seed-stage deals. (More information about the types of rounds included in this stage can be found in the Methodology section at the end.)

Seed-stage startups are sprouting up (and raising capital) like it’s going out of style. According to Crunchbase projections, deal volume is up a massive 18.5 percent since last quarter and 17.6 percent since Q3 2018. Dollar volume is up by similarly large margins—growing by 24.2 percent quarter-over-quarter and 7.7 percent year-over-year. For any early-stage investors worried about future deal-flow pipeline issues, this growth should be heartening.

On the one hand, angel and seed-stage deals are a big part of the global venture landscape, accounting for nearly 65 percent of deal volume in Q3 2019. However, because these deals are quite small (typically less than $5 million, though there’s an uptick in super-sized seed deals) they accounted for just 5.9 percent of total venture dollar volume—a virtual rounding error as far as that metric is concerned.

Angel and seed-stage venture exhibits the pattern of geographic divergence that’s present in the market as a whole. U.S. and Canadian startups accounted for 43 percent of worldwide angel and seed-stage dollar volume in Q3 2019, up from 34.7 percent of global totals in Q3 2018. Simultaneously, North America’s share of global deal volume is on the decline: from 40.8 percent in Q3 2018 down to 37.7 percent in Q3 2019.

Angel and seed-stage deals are also growing worldwide. The average seed deal in Q3 2019 is 7.1 percent larger than Q2 2019 and 15.4 percent larger than in Q3 2018. Although quarter-over-quarter change in the average deal size is likely attributable to outsized outlier rounds, changes in median deal size—the center value in the distribution—point to broader population-scale changes. Seed-stage deals really are getting larger.

Early-Stage Deals

Early-stage deals are the bread and butter of venture data. Crunchbase projects that $27.63 billion was invested across 2,572 early-stage deals in Q3 2019.

Including Series A and Series B rounds, plus transactions from a selection of other round types, the global venture market can attribute roughly 28.3 percent of its deal volume and roughly 36.8 percent of dollar volume to early-stage startups.

It appears as though early stage is one in which more money is chasing fewer deals over time. Early-stage deal volume declined quarter-over-quarter and year-over-year, whereas dollar inflows continued to grow. Early-stage venture dollar volume is up 2.8 percent quarterly and 7 percent annually, according to Crunchbase projections.

Considering the ballooning seed-stage market, this is an interesting phenomenon, but one that may reverse course as seed-stage companies mature and, presumably, will start seeking additional funding. If this dynamic does not change over the next several quarters, the early-stage crunch of yesteryear will return in full force.

The same pattern of geographic divergence exists amidst early-stage investments as with their earlier counterparts. U.S. and Canadian startups accounted for 36.6 percent of worldwide early-stage dollar volume in Q3 2018, which grew to 41.3 percent in the just-ended quarter. And again, the geographic distribution of deal volume is trending the other direction. North American startups accounted for just 40.1 percent of worldwide early-stage deal volume in Q3 2019, compared to a marginally more robust 44.9 percent back in Q3 2018.

In the case of early-stage deals, we see similarly robust round size growth.

Quarter over quarter, the average early-stage round grew by 5.9 percent. Compared to the same period last year, Q3 2019’s average early-stage round grew by 10.2 percent. Significant growth in median round size, particularly on a year-to-year basis, largely rules out outliers as the sole driver behind changes in these metrics: as seed rounds grow, so do early-stage deals.

Late-Stage & Technology Growth Deals

Crunchbase projects that, combined, $43.37 billion was invested across 653 late-stage and technology growth deals in Q3 2019.

Late-stage and technology growth deals are fewer in number than early-stage deals but much larger in size. Late-stage deals—Series C, Series D, and beyond, plus a high-dollar subset of other equity funding types—and private equity deals raised by previously venture-backed companies (which Crunchbase calls “technology growth” rounds) account for just 7.2 percent of deal volume, but 57.4 percent of total dollar volume.

Since technology growth deals are relatively few and far between (a projected 44 deals representing just over $2.5 billion) we’ll focus here on traditional late-stage deal and dollar volume.

Late-stage deal and dollar volume is up on both a quarter-over-quarter and year-over-year basis. Crunchbase projections indicate that deal volume is up 5.4 percent relative to Q2 2019, and grew by an even more robust 9.3 percent compared to Q3 2018. In dollar volume terms, the differences between quarterly and annual growth are more stark: dollar volume grew QoQ by roughly 12.4 percent, but is up just 3 percent relative to the third quarter of last year. It should be noted that, between Q2 2018 and Q3 2018, there was the largest quarterly decline in late-stage dollar volume, worldwide, in several years. In other words, the late-stage market is in something of a holding pattern.

This holding pattern becomes more apparent when looking at how late-stage round size has changed over the past several quarters.

Average late-stage deal size in Q3 2019 is up 8.3 on a sequential quarterly basis, but grew by only 2.5 percent compared to the same time last year. Again, when dealing with smaller sample sizes with high variance, outliers can skew averages by a significant margin. Median deal size is the metric which shows that late-stage venture is a market gone sideways. Median late-stage deal size is unchanged on a quarterly basis, and up just 3 percent relative to the same period last year.

Even at these latest stages of the venture lifecycle, a similar pattern of geographic distribution of deal and dollar volume is present to what we saw at seed and early-stage.

When it comes to dollar volume, North American companies are gaining on peers located in the rest of the world. U.S. and Canadian startups accounted for 47.8 of late-stage and tech growth dollar volume in Q3 2019, up from 43 percent the year before. That said, deal volume is growing more quickly elsewhere. North American startups made up 39.1 percent of late-stage and tech growth deal volume this past quarter, compared to 43 percent in Q3 2018.

Money Out

• Bullish key finding. Software companies are seeing strong exits through IPOs.
• Bearish key finding. Certain well-funded unicorns stumbled while working to provide liquidity to their shareholders.

A Quick Overview Of Liquidity

Startup equity is an illiquid asset, meaning that there isn’t really an open market for private company shares. Founders, employees, and investors often hold startup stock for long periods of time, but to realize their capital gains, stakeholders need to “exit” their positions. Unlike publicly-traded stocks, which can be bought and sold more or less instantaneously on an open exchange, private company shareholders rely on two primary paths to liquidity: a merger or acquisition (M&A) or an initial public offering (IPO).

There is a third path: selling shares in a secondary market transaction. However, since private companies aren’t typically required to disclose these internal sales to the public and most of the major secondary market brokers are pretty secretive about their clientele and dealmaking, there just isn’t enough available information to comment on broader trends in the secondary market. This being said, as companies continue to prolong their time to exit by way of IPO or M&A, early stakeholders are more likely to lobby for this alternative path to liquidity.

Below we’ll look at traditional startup liquidity methods, M&A and IPOs.

Venture-Backed Acquisitions

Q3 2019 venture-backed M&A deal volume clocked in at 326 reported transactions, down 14.2 percent. This marks the largest QoQ M&A deal volume decline in at least three years. Dollar volume is quite variable from quarter to quarter, so we don’t place much analytical weight on that measure, but it’s worth noting that there weren’t many high-dollar deals in Q3 either.

Over the past several quarters, Crunchbase News has documented the persistent general downtrend in reported venture-backed M&A. Though some quarters see more deals than others, the general pattern is one step forward and two steps back.

Initial Public Offerings

The second path to exit is through an initial public offering.

Throughout their private-company existence, startups have fairly limited options when it comes to the types of investors they’re able to raise from. Because startup equity is a fairly risky asset class, most jurisdictions limit access to “sophisticated” investors. Which is to say, mostly wealthy folks.

To raise money from the general public, companies typically undergo a period of intense regulatory scrutiny to ensure that the company is nominally doing what it says it’s doing and that its financials are up-to-date and reasonably transparent. Though newly-public companies still present plenty of risk, once regulators deem them safe enough for public consumption, startups are able to raise money on the open market. As part of this process, common and preferred shares in the previously private company become publicly-traded securities, giving early stakeholders the option to either hold their position or liquidate it for cash, following the customary lock-up period.

Q3 2019 presented something of a turning point in the IPO market. Companies with robust fundamentals and a narrative which suggests continued growth did fairly well. Others, with “visionary” founders and specious claims about “elevating consciousness” and “selling happiness” didn’t fare so well.

Here we see a real stratification in the IPO market. On the one hand, technology companies with strong economics, a profitable business (or a clear path to profitability), reasonable prospects for growth, and a stable management team have done fairly well when raising from public markets. Datadog, for example, priced its IPO at $27 and opened at $40.35 in its first trades as a public company. At time of writing, its shares trade at $37.

For companies with more faith-based valuations, not so much. WeWork is definitely the most conspicuous flop of the quarter, but other ventures with lofty private market valuations also stumbled out of the gate. Interactive fitness firm Peloton and its underwriters set an IPO share price of $29, but its shares closed out day one of public-market trading at $25.76. At time of writing, Peloton shares trade below $24.

Lackluster IPOs (and failures to launch) in Q3 affect the future IPO pipeline. Postmates CEO Bastian Lehmann said his company will delay its public market debut, citing “choppy” market conditions.

Additionally, the IPO process itself is being called into question. An effort led by Benchmark general partner Bill Gurley advocates founders opt to list their shares directly on open-market exchanges. This could work for profitable companies like Airbnb, which don’t really need the additional working capital underwriters provide.

With WeWork’s IPO shelved seemingly indefinitely, Airbnb slated to go public (whether by direct listing or through a traditional IPO) in 2020, and Postmates delayed until further notice, Q4’s IPO calendar might look a little sparse.

Conclusion

The current bull run for startups might be getting a little long in the tooth.

The fates of some of most lavishly-funded ventures from this past cycle were largely decided this year, and the outcomes weren’t always great. The introspection brought by humdrum debuts by the likes of Uber, Lyft, Slack, Peloton, and others (including WeWork’s non-debut) prompted a moment of introspection for some tech investors. What, exactly, is a tech company in a time where basically everything a business does these days is mediated through a website or mobile app? What kind of margins merit tech company valuations? How does one balance the wishes and whims of founders with the long-term well-being of the company as a whole, when more than just personal cash is at stake?

If, in the long run, the market is a weighing machine that’s consistently coming up a little light these days, then the scales might start tipping in the other direction: toward diminished founder power; toward more muted valuations; toward more scrutiny of claims that a “tech company” is actually a tech company; toward, ultimately, more discipline. Because investor largesse has gotten the market—what?—flat-lined public offerings, heaps of cash torched in protracted wars of attrition with similarly-funded competitors, employees who are underwater on their options, and a staggering amount of faith placed on founders spouting woo about changing the world. The first rule of changing the world is that you don’t talk about changing the world.

With any luck, it is the culture of disruption that will itself be disrupted by a new way of doing business, just like Professor Christensen would suggest.

It’s for this reason that the spike in seed-stage venture is, ultimately, heartening. Whether these founders and their backers are taking a leap into new ventures just as the bottom threatens to fall out from under global political and economic order remains to be seen. But assuming we dodge economic calamity, hopefully the excesses revealed by last quarter leave a mark in the market’s collective memory.

Tech may be new-fangled, but the principles of business never change. Try to make more money than you spend. Provide a quality product or service, consistently. Grow at a pace you can afford. And do your best to ensure that everyone comes out a little better off than they went in. That’s not what’s happening everywhere in startup-land, but it doesn’t have to be the same going forward

Update: The section documenting dollar volume totals has been updated to correct a numerical error in the original report.

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 with participation from venture investors.

Illustration: Dom Guzman