A guest post written by Brock Benefiel. Brock is a digital marketing consultant, tech writer, and author of the upcoming book Flyover Startups.
Third quarter venture capital investing showed the remarkable shifts of recent years now look like the new normal.
New reports on venture capital investing in the third quarter of 2018 showed a market that continues to undergo rapid transformation and record-setting growth. PwC/CB Insights MoneyTree, Crunchbase and Pitchbook/NVCA Venture Monitor all published 3Q reports that analyzed investment data both in the U.S. and abroad and highlighted the continued trend toward bigger and bigger deals. Here are the main takeaways:
The U.S. is on pace to surpass $100 billion
Investments in 3Q neared $28 billion in the U.S. alone, bringing the 2018 total as of September 30 to $84 billion. That puts the U.S. on pace to surpass the $100 billion mark in investments this year. To compare, in 2017, $82 billion was invested. Total VC investment is on pace in 2018 to hit a decade-high level.
This is the era of megafunds and supergiants
What’s driving the massive growth in VC dollars? Big funds and gigantic deals.
Venture capital money coming from megafunds funnelling into super deals isn’t a recent phenomenon. However, as the report states, 2018 is the year it “has solidified into the status quo for the U.S. VC ecosystem.” Supergiants—deals of $100M or more—were far from rare in the third quarter – with a total of 51 deals over the $100M mark in 3Q, according to the Pitchbook/NVCA report. That represented $10.96 billion in value and over 63.9% of total late-stage capital invested. Deals that exceed $50M are also way up this year; compare 292 deals in all of 2017 to 378 rounds already closed this year.
The size of deals are going up across the board, too. In the first three quarters, the median size of US investment deals has grown by 23.8% year-over-year.
But fewer deals are getting done
Not all boats are rising with the tide. More money is coming in, but fewer deals are getting done, which is hitting early-stage companies the hardest. PitchBook/NVCA Venture Monitor report noted that there was a double-digit decline in early-stage deals and a major dip (26.5%!) in angel and seed deals. Again, this is nothing new to 2018. In terms of total deal count, 2018 is just 28.9% shy of the entire 2017, so the year-over-year count is expected to be about the same.
This is an odd pattern for an industry designed to fuel disruption. “This isn’t a classical Clayton Christensen ‘underdog usurps the incumbents to overtake the market’ case of disruption,” Jason D. Rowley notes. “It’s a more of a flipping the table during a particularly feisty Monopoly match and scattering the banker’s cash in the process.”
Non-traditional investors continue to make their mark
As PitchBook/NVCA Venture Monitor reported, hedge funds, mutual funds, sovereign wealth funds and corporate VCs are helping to make up the growing pool of bigger dollars and larger funds. Corporate VC deals in particular have already surpassed 2017’s end-of-year total by 3Q and over the past five years these investments have more than doubled. “Notably, deals with participation from corporate investors make up 46.7% of overall VC, a high point compared to just 32.0% five years ago,” the report claims.
Companies are raising money later in early rounds
Early-stage investments are now happening later in a company’s life. In 2018, the median company age has risen for businesses raising angel rounds through Series C rounds. At the angel and seed stage, according to Pitchbook/NVCA, median age has jumped the most – up 22.8% this year alone. The median age for a company to raise an angel or seed round is settling at three years in 2018 and at all the way up to seven years for a Series C.
Companies are older, funds are larger, fewer deals are getting done and the whole industry is booming overall. This is a remarkable time for VC investments in the U.S., and the 3Q only reaffirmed 2018 is on pace for very exciting end-of-year results—if only for fewer founders.