Increased Polarization in the Venture Market
Dollars Invested Reaches Highest Quarterly Total since Q2 2001
Number of Deals However Remained Flat as Dollar Spike was Driven by 19 Later Stage Deals of Over $100MM Each
Percentage of Dollars Invested in First-Time Financings Fell to Lowest Level in Twenty Years
Silicon Valley is the Epicenter of Mega Deals with 50% of Dollars Invested, but only 34% of Total Deals
PricewaterhouseCoopers / National Venture Capital Association MoneyTreeTM Report, Data: Thomson Reuters; 2014 Rolling Four Quarters through 03/31/14; Industry, Stage, and Regional data for quarter end; Consumer Industry includes Business Products & Services, Computers & Peripherals, Consumer Products & Services, Electronics / Instrumentation, Financial Services, IT Services, Media & Entertainment, and Retail / Distribution; Industry Sector includes Biotechnology, Healthcare Services, and Medical Devices & Equipment; Other Industry includes Industrial / Energy, Networking & Equipment, Semiconductors, and Telecommunications; Top four Regions by quarterly Dollars broken out
$9.5B was invested in 951 venture-backed companies in Q1 2014, marking the highest quarterly dollar total since Q2 2001 according to the MoneyTreeTM Report. While this was a rolling four quarter increase of 12% in capital invested, the number of deals remained flat. The spike in dollars invested, consequently, was caused by an increase in average deal size driven primarily by several very large deals this quarter. PitchBook noted that there were 19 “mega-rounds” of $100MM or more in Q1 2014 (PitchBook Data, 2014). This was led by a $900MM round raised by Cloudera, reportedly valuing the company at more than $4B post-money. Cloudera is currently backed by Accel, Greylock, Meritech, Ignition, In-Q-Tel, Google Ventures, and Intel, among others.
Conversely, first-time venture financings increased only slightly by 5% on a rolling four quarter basis to $1.2B raised by 271 companies, a 1% decline. While the average first-time deal size remained $4.4MM in Q1 2014, the percentage of first-time deals to total deals fell to 28%, which was the lowest level since Q3 2009, and the percentage of dollars invested in first-time deals fell to 13%, which was the lowest level in the twenty year history of the MoneyTreeTM Report. Coupled with the consolidation in venture capital fundraising towards larger, later-stage funds, the decrease in first-time financings in spite of a spike in total capital raised by venture-backed companies this quarter demonstrates further polarization in the venture capital market.
According to PitchBook, median pre-money valuations were up across every stage of investment this quarter. The Series D or Later median pre-money valuation increased dramatically by 48% from $105MM in 2013 to $155MM in Q1 2014. This was driven by companies including Cloudera (aforementioned), DocuSign, Domo, and Tango, which all closed rounds above the median Series D or Later level. Similarly, the median round amount was up across every stage in Q1 2014, with the most dramatic increase being in Series D or Later, up significantly by 79% from $20MM previously.
Seed stage investments fell 9% on a rolling four quarter basis by dollars raised and fell 6% by number of deals, according to the MoneyTreeTM Report. Early stage investments increased 13% by dollars over the same period, but only by a modest 2% in number of deals. Expansion stage investments increased dramatically on a rolling four quarter basis by 19% in dollars raised and more moderately by 4% in number of deals. Consequently, the average Expansion stage deal increased 39% from $10.3MM to $14.3MM in Q1 2014 according to the MoneyTreeTM Report. Additionally, Later stage investments increased 4% by dollars and fell 2% by number of deals on a rolling four quarter basis.
Software remained the largest industry segment by dollars invested in Q1 2014, reaching $4B, which is the highest level since Q4 2000. Software investments represented 42% of total dollars invested and increased 15% on a rolling four quarters basis. Biotechnology was the second largest sector by dollars invested, at 11% for Q1 2014. Coupled with Medical Devices and Equipment investments, Healthcare deals totaled 18% by dollars for the quarter. However, Biotechnology and Medical Devices and Equipment investments increased only 4% and 1%, respectively, by dollars raised on a rolling four quarters basis. The IT Services, Media and Entertainment, Consumer Products and Services, and Industrial /Energy sector comprised the next largest segments at 9%, 8%, 6%, and 5% of dollars raised, respectively. IT Services achieved the greatest growth rate of 28% on a rolling four quarters basis.
Internet-Specific investments, a discrete classification for companies with business models fundamentally dependent on the internet regardless of primary industry, were up 14% on a rolling four quarter basis by dollar amount, accounting for 24% of total Q1 2014 investments. Cleantech investments, a similarly discrete classification, were down 2% on a rolling four quarter basis by dollar amount, reaching only 4% of total Q1 2014 investments.
Silicon Valley deals accounted for a full 50% of total capital invested in Q1 2014 and increased 19% in dollar amount on a rolling four quarter basis. However, Silicon Valley companies only represented 34% of the total number of investments, meaning that Silicon Valley based deals were significantly larger than those in other regions during Q1 2014. Capital invested in Midwest companies also increased significantly by 26% on a rolling four quarter basis, but represented only 4% of total dollars in Q1 2014. NY Metro investments by dollars raised reached 10% of the total for the first quarter and increased 13% on a rolling four quarter basis. While Texas deals represented 4% of total dollars invested in Q1 2014, they fell 15% on a rolling four quarter basis. However, this was mostly negated by the fact that Southwest deals reached 3% of total capital, up 34% on a rolling four quarter basis, such that dollars raised by Texas and Southwest companies were only down 2% in aggregate on an annualized basis.
Bobby Franklin, President & CEO of the NVCA, noted that,
Context is everything, and when you consider the context behind the numbers, you start to understand why there was a shift in the first quarter of 2014. Seed and early stage financing numbers are down from the previous quarter, but expansion stage dollars invested are up 34 percent. This was to be expected when you consider the domination by seed and early stage deals in 2012 and 2013. Because these companies are now moving to the next stage of their maturing process, the investment rounds tend to be bigger, which explains why the numbers are trending toward the later stages of the investment calendar. To be sure, the spring thaw of the exit markets is providing some firms with new life, but overall capital remains constrained for most venture capital firms.”
The views, opinions, beliefs, conclusions, and other information expressed in this material is not given, verified, or endorsed by Square 1 Bank, a division of Pacific Western Bank. Instead, this material is solely the work of the author, and represents his views, opinions, beliefs, conclusions, and other information he wishes to present, in all cases without any manner of endorsement from or verification by Square 1 Bank, a division of Pacific Western Bank.
This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that the author believes to be reliable, but which has not been independently verified by the author or Square 1 Bank, a division of Pacific Western Bank, and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal, or other advice, nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to this material should be construed as a solicitation, offer, or recommendation to acquire or dispose of any investment, or to engage in any other transaction.
All material presented, unless specifically indicated otherwise, is under copyright to the author or Square 1 Bank, a division of Pacific Western Bank, and is for informational purposes only. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied, or distributed to any other party, without the prior express written permission of Square 1 Bank, a division of Pacific Western Bank or the author. All trademarks, service marks, and logos used in this material are trademarks, service marks, or registered trademarks of Square 1 Bank, a division of Pacific Western Bank.
Square 1 Bank is a division of Pacific Western Bank, member FDIC.