US Venture Capital Market Review
In 2015, the venture capital market produced strong results overall. Financing activity remained consistent with the high level of 2014, while deal proceeds increased by almost one-quarter, as the median pre-money valuation hit a record for the second year in a row. The number of VC-backed US issuer IPOs fell below the yield for 2013 and 2014, but still represented the fourth-highest annual figure since the dot-com boom era, and the median acquisition price for VC-backed companies was the highest since 2000. Prospects for VC-backed companies generally appear favorable heading into 2016, although both financing and liquidity activity may face headwinds in the coming year.
Equity Financing Activity
The number of reported venture capital financings dipped 4%, from 4,089 in 2014 to 3,916 in 2015—a decline that is almost certain to be erased once all 2015 deals are accounted for. Even adjusting for the normal lag in deal reporting, deal flow appears to have slowed, at least modestly, over the second half of 2015. The first six months of the year produced 2,074 deals, compared to 1,842 over the last six months of the year.
Total reported venture capital financing proceeds jumped 24%, from $58.2 billion in 2014 to $72.3 billion in 2015. The 2015 tally was the highest since the $92.9 billion in 2000 and more than double the average of $36.0 billion in total annual proceeds that prevailed for the five-year period preceding 2014. Total financing proceeds increased in each successive quarter of 2015, before declining in the fourth quarter to the lowest quarterly level since the third quarter of 2014. The median size of all venture capital financings increased 15%, from $5.2 million in 2014 to $6.0 million in 2015—the highest level since 2008.
The median size of first round financings increased for the second year in a row, from $3.1 million in 2014 to $3.2 million in 2015. The median size of second-round financings increased by a wider margin, up 13%, from $6.6 million in 2014 to $7.5 million in 2015, but the 2015 figure still fell short of the $8 million–plus second-round sizes that prevailed between 2005 and 2008. The median size of later stage financings, which had remained steady at $10 million between 2011 and 2013, increased from $14 million in 2014 to $15 million in 2015—the highest tally since the $20 million figure in 2000.
The median financing size for life sciences companies increased for the fifth consecutive year, up 6%, from $7.5 million in 2014 to $8.0 million in 2015, trailing only 2007’s $8.5 million figure as the sector’s highest median financing size. For technology companies, the median financing size remained steady at $5.0 million, but is significantly lower than the typical median financing size during the ten-year period preceding 2009. The general decline in the median financing size for technology companies in recent years is at least partly attributable to technological advances that have enabled startups to commence and grow their operations with a lower level of funding than historically required—in many cases, cloud computing and open-source software have replaced the need to purchase expensive server racks, hire support staff and acquire costly software licenses.
As venture-backed companies increasingly have relied on IPO-sized later-stage rounds of financing—sometimes with the intention to eschew the public markets entirely— the volume of very large financings has increased dramatically. The number of financing rounds of at least $50 million increased from 83 in 2012 to 112 in 2013, almost doubled to 209 in 2014, and then increased a further 32% to 275 in 2015.
The number of financing rounds of at least $100 million increased from 19 in 2012 to 28 in 2013, more than doubled to 63 in 2014, and then leapt another 60% to 101 in 2015. These increases in supersized rounds continue to be driven largely by private equity, crossover and hedge funds, which historically had avoided investments in private companies but are now attracted to pre-IPO companies that offer the potential for sizeable valuation increases and investment returns, especially when investors are able to negotiate ratchet provisions guaranteeing them a minimum return at the time of an IPO, typically in the form of additional shares if the offering prices below a set price.
There were six billion-dollar financing rounds in 2015. This elite club was led—for the second year in a row—by Uber (with a $2.1 billion financing and a separate financing for $1.0 billion), followed by Airbnb ($1.5 billion) and Lyft, Social Finance and SpaceX (each $1.0 billion).
The median pre-money valuation among all venture financings increased 35%, from $43.3 million in 2014 to $59.1 million in 2015—the highest level since 1996 (the first year for which this data is available). Both life sciences and technology companies enjoyed sharp increases in valuations. The median pre-money valuation in the technology sector increased 36%, from $36.8 million in 2014 to $50.0 million in 2015. Among life sciences companies, the median pre-money valuation increased 34%, from $42.0 million to $56.4 million, the fifth year in a row that the median pre-money valuation in the sector has been higher than that of tech companies.
While the 2015 figures are likely understated, the number of reported seed and first-round venture capital equity financings declined by 39% and 5%, respectively, from 2014 to 2015. Seed and first-round financings accounted for 40% of all venture financings in 2015—down from 44% in 2014 and 48% in 2013. Proceeds from seed and firstround equity financings represented 13% of all venture capital financing proceeds in 2015, down from 16% in 2014 and 20% in 2013. The number of second and laterstage round financings increased by 8% and 4%, respectively, between 2014 and 2015. Proceeds from later-stage equity financings represented 64% of all venture capital financing proceeds in 2015.
The technology sector accounted for 27% of the year’s transactions in 2015, up slightly from 26% in 2014. The business and financial services sector (which had supplanted the technology sector for the largest market share for the first time in 2014) saw its market share decline from 27% to 26%. After posting four consecutive declines between 2009 and 2013, the market share for life sciences companies increased for the second year in a row, from 20% in 2014 to 21% in 2015.
California—which has led the country in financing activity in each year since 1996—accounted for 42% of all venture financing transactions in 2015 (1,644 financings) and 56% of all proceeds ($40.6 billion). New York, home to companies with 429 financings raising $7.26 billion in 2015, finished second in deal flow for the fourth year in a row, just ahead of Massachusetts, which logged 332 financings raising $6.67 billion. Texas (with 147 financings raising $1.71 billion) and Washington (with 132 financings raising $1.86 billion) rounded out the top five positions for 2015.
The number of venture-backed US issuer IPOs declined by 38%, from 102 in 2014 to 63 in 2015. While the 2015 figure also fell short of the 72 VC-backed US issuer IPOs in 2013, it represented the fourth-highest annual figure since 2000. The largest VC-backed IPO of 2015 was the $732 million offering of Fitbit, followed by the IPOs of Atlassian ($462 million), Pure Storage ($425 million), Etsy ($267 million) and Sunrun ($251 million). The median amount of time from initial funding to an IPO inched down from 6.9 years in 2014 to 6.7 years in 2015—the second lowest annual figure since 2007.
In 2015, 68% of all VC-backed IPOs were by life sciences companies, up from 63% in 2014 and 51% in 2013, while the VC-backed IPO market share for technology companies decreased from 49% in 2013 to 34% in 2014 and 30% in 2015.
The median amount raised prior to an IPO increased 6%, from $88.4 million in 2014 to $93.9 million in 2015, and the median pre-IPO valuation increased 22%, from $216.7 million to $265.0 million. As a result, the ratio of pre-IPO valuations to the median amount raised prior to an IPO by venture-backed companies going public increased to 2.8:1, up from 2.5:1 in 2014 (a higher ratio means better returns to pre-IPO investors). Despite the increase, the ratio is at its second-lowest level in the last 20 years. The ratio was between 3.2:1 and 5.5:1 for each year from 2001 to 2012, other than a spike to 9.0:1 in 2009 based on a very small sample size of VC-backed IPOs that year. In contrast, this ratio ranged from 7.5:1 to 10.0:1 from 1997 to 2000, due to very large pre-IPO valuations by younger companies.
The number of reported acquisitions of VC-backed companies declined 7%, from 562 in 2014 to 522 in 2015, while total proceeds fell by one-third, decreasing from $87.4 billion to $58.3 billion. Once all 2015 acquisitions are accounted for, 2015 deal activity should be in line with 2014, although the shortfall in proceeds is likely to remain, due to a decline in the number of acquisitions with purchase prices of at least $500 million.
The median acquisition price for venture backed companies increased 31%, from $65.0 million in 2014 to $85.0 million in 2015—the highest annual figure since the $100.0 million in 2000. Aside from a tiny uptick in 2012, the median amount of time from initial funding to acquisition has declined for eight years in a row, from 6.5 years in 2007 to 4.6 years in 2015.
The median amount raised prior to acquisition decreased 11%, from $14.1 million in 2014 to $12.5 million in 2015. The ratio of median acquisition price to median amount raised prior to acquisition increased from 4.6:1 in 2014 to 6.8:1 in 2015 (a higher ratio means higher returns to pre-acquisition investors). This ratio in 2015 was the highest annual figure since the ratio of 10.0:1 in 2000 at the apex of the dot-com delirium. The increase in this ratio largely stems from significantly higher acquisition prices, coupled with historically low investment levels prior to acquisition.
There were a total of 19 VC-backed company acquisitions for at least $500 million in 2015, down from the 23 in 2014 but well above the nine in 2013. The eight billion-dollar acquisitions of VC-backed companies in 2015 fell one shy of the prior year’s tally, but topped 2013’s total by one.
The above comparison of the ratios of valuations to the financing amounts required to achieve liquidity events indicates that—for only the third time since 2000, and for the third consecutive year—returns to venture capital investors in 2015 were higher in M&A transactions than in IPOs. Furthermore, venture investors generally achieve liquidity more rapidly in an M&A transaction (which frequently yields the bulk of the purchase price in cash at closing) than in an IPO (which generally involves a post-IPO lockup period of 180 days and market uncertainty on the timing and prices of subsequent sales). Highlighting the uncertainty of an IPO as the path to liquidity, the average 2015 VC-backed IPO eked out a gain of less than 2% during the year, with 59% of IPO companies trading below their offering price at year-end.
When combined with 2015’s shorter timeline from initial funding to liquidity for M&A transactions (4.6 years) than IPOs (6.7 years), these data points underscore why venture capitalists often prefer a company sale to an IPO.
Following six years of consecutive declines, the ratio of M&A transactions to IPOs for venture-backed companies increased from 5.5:1 in 2014 to 8.3:1 in 2015. Despite the increase, the 2015 ratio was at its fourth-lowest level since 2000.