Venture Capital Fundraising

According to data out of private equity and venture capital data provider Pitchbook, the first half of 2019 saw quite robust fundraising.  Although slightly slower than 2018’s massive fundraising year, the first half of 2019 saw almost $21 billion in total funding raised.  Behind the $21 billion were 103 funds closed, 9 mega-funds (funds with $500 million or more raised), and 10 new general partners securing funding. 

The top fundraisers were TVC at $3.2 billion, followed by Andreessen Horowitz at $2.1 billion, Lightspeed Venture Partners at $1.4 billion, Flagship Pioneering at $824 million, and a second Andreessen Horowitz at $791 million. 

Venture capital is big, and it’s getting bigger.

Source: Pitchbook

Fewer Deals but More Capital

The interesting thing of the venture capital boom is the recent shift towards more capital flowing into fewer deals. 

In the first half of 2019, a total of $66 billion was deployed by the venture capital sector.  Of this $66 billion, 44.6% came from mega-deals (deals with $100million or more).  This 44.6% is up a lot from 2014’s 25.4%.

In dollar terms, $20.9 billion of venture capital investment went into late-stage venture capital investments, well ahead of the 754 early-stage venture capital deals that summed to just $8.9 billion.  At the bottom end of the dollar spectrum was angel/seed investment deals, with Pitchbook reporting $1.7 billion invested across 1,001 deals.

This trend of fewer deals but more capital may be a trend the venture capital is moving towards long term.  Hmm.

Source: Pitchbook

The Second Quarter of 2019 Saw the Largest Quarterly Exit Value Ever

The last point here on the state of venture capital is that unicorns are turning to public markets.  The second quarter of 2019 was the largest ever for exit value, with Uber ($68 billion), Slack ($23 billion), Pinterest ($9 billion). Zoom ($9 billion), and CrowdStrike ($6 billion) turning to the public markets for funding. 

The total exit value in the second quarter reached almost $189 billion, of which almost three-fourths (73.4%) came from these five massive unicorns. 

The venture capital world is changing, and it’s changing quickly.

Source: Pitchbook

Conclusion

Venture capital investment activity is booming.  Exit activity from venture capital investors saw its largest quarterly exit value ever in Q2 2019.  Fundraising for venture capital funds is still expanding.  Overall, there’s no evidence that love for what venture capital does will slow down anytime soon.  To sum up, venture capital is, once again, a cool industry to be in.

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Venture capital (VC) investment is booming.  After a record year in 2018, many analysts thought 2019 would be a letdown.  There would be no way that VC could even come close to the massive 2018 investing.  Well, that view has changed.  A look at the state of VC activity in the U.S. follows.

VC Pulls from Investors

First up is the amount of VC money deployed by quarter over the past five years.  Amazingly, for the sixth consecutive quarter, VCs have invested $25 billion or more.  Although down from the massive fundraising in the fourth quarter of 2018, both quarter in 2019 have been more than healthy.  The most recent quarter came in around $30 billion, down slightly from the prior quarter.

Massive Deals are Becoming “Normal”

The second telling chart of the state of VC acidity is the count and value of “mega-deals”.  Through the first half of 2019, there have been a total of 123 mega-deals amounting to almost $30 billion in value.  That is almost on target to hit 2018’s record year of 208 mega-deals with deal values of almost $62 billion.  There is no sign, yet, that VC activity is entering any sort of doldrums environment.  Investors are still in love with successful entrepreneurship. 

A Cautious Note

The third chart on the state of VC in the U.S. paints a bit more cautious note.  Shown in the following is quarterly U.S. angel and seed deal activity.  Since peaking at 1,511 in the first quarter of 2015, angel and seed activity has slowly decelerated, with the deal count down to 1,001 in the second quarter of 2019.  Deal value has also stayed relatively flat.  In the second quarter of 2019, deal value reached $1.7 billion, which is down slightly from the $2.0 billion in the first quarter of 2015. 

Investors, in a somewhat jittery note, have pushed their angel and seed investing activity to later stages of a company, with the median age of a company receiving its first angel investment at about 3 years.  Apparently managing risk in VC investing means shifting attention to somewhat more established companies.

A Geographic Breakdown

The last chart on the state of VC activity is a geographic breakdown of activity.  As expected, the West Coast, which comprises California, Oregon, Washington, Alaska, and Hawaii, dominates VC investment.  In the second quarter of 2019, the West Coast attracted 58 percent of all VC activity.  The next closest region was the Mid-Atlantic at 17 percent.  None of the remaining regions surpassed 10 percent of total deal value.  VC still loves California, at least for the near term.

Conclusion

Venture capital activity is doing so well, it is almost unbelievable.  After a record 2018, this year has given us no letdown.  If the first half of 2019 is any indication of where venture capital activity will end this year, we are in for another massive year of deal making, public offerings, and rewards for successful entrepreneurship.  May the good times live on forever.

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If you’ve been around the private equity industry long enough, you know that presidential elections bring up strong feelings on the issue.  Based upon what has been said in the past couple of weeks, the private equity industry is again a lighting rod for political posturing.  A look at what some of the recent comments made by leading democratic presidential candidate Elizabeth Warren follows. 

(Please note that no political leanings are meant to be inferred here.  Whether one votes Republican or Democrat is just fine – this article simply looks at the policy issues being discussed).

“Putting Private Equity on the Hook”

One of the suggestions Senator Warren (and many of her democratic colleagues) have mentioned is putting private equity firms on the hook for debts of companies they buy.  In theory, proponents of this idea think that such a requirement would make private equity professionals responsible for the downside of their investments so that they only make money if the companies they control flourish.

The American Investment Council, a lobbying group for the private equity industry, was not favorable to Senator Warren’s proposals: “Private equity is an engine for American growth and innovation – especially in Warren’s home state of Massachusetts.  Extreme political plans only hurt workers, investment and out economy,” said the group.

“Private Equity Firms Responsible for Pension Obligations”

Some critics of the private equity industry claim that private equity firms act like vampires, sucking the blood out of the companies they invest in before leaving the company to rot after all the blood has been sucked out.  Whether this is an accurate portrayal or not is a political question, but opponents of the proposal argue that “Senator Warren’s financial service plan to limit private equity firms is another brick in the wall to stop growth, job creation and creating return for retirement.” (Tom Quaadman, US Chamber of Commerce)

“Eliminating Private Equity Firms’ Ability to Pay Themselves Monitoring Fees and Paying Dividends to Themselves”

This idea has its root in the nature of private equity funding.  Most of the work performed by private equity professionals is on the front end, where professionals make decisions about what companies get funded and by how much. 

After an initial investment, private equity firms monitor investments, which basically means reading news reports and crunching numbers every now and then.  It’s simple work, and some say that the private equity industry is way overpaid for such work.  This characterization may be true but forgets the amount of risk private equity firms are taking with the initial investments.  At the end of the day, this suggestion is another political question to be decided in the polls.

“Altering Tax Rules So That Private Equity Deals Don’t Get Lower Tax Rates on the Debt Placed with Purchased Companies”

This suggestion is hotly debated.  Does the debt private equity firms put on acquired firms improve or deteriorate the condition of acquired firms?  Unsurprisingly, the answer to this question is it depends.  Should this aspect of private equity financing change, it would likely change the nature of private equity practice forever.  Opponents would suggest that pro-private equity reform advocates tread lightly in this area.

“Closing the Carried Interest Loophole”

The last issue mentioned here (although nowhere near the last suggestion on potential regulatory changes for the private equity industry) is closing the carried interest loophole.  In theory, the idea here is to make it so that the money private equity professionals make is taxed similar to wages rather than capital gains.  As with the previous suggestions, whether the money the private equity industry makes is wage income or capital gains largely depends upon one’s political philosophy.

These issues are only a portion of the ideas that have been floated to change the way the private equity industry operates.  Whether they go anywhere beyond political posturing is a question of election success – it seems important, though, that private equity professionals keep themselves afoot of potential changes coming down the pike.

Conclusion

Private equity – again – appears as a hot button issue in the presidential election.  After moves by the Trump administration to deregulate the financial services industry, democratic presidential candidates are taking aim at re-regulating and/or imposing new regulations on the industry.  At least for the coming year, the practices of the private equity industry will continue to be a much-discussed issue on the campaign trail.

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Startups Becoming VCs Themselves

July 8, 2019

When one thinks of a firm involved in mergers and acquisitions (M&A), the idea of a startup generally does not come to mind.  Rather, when most people think of M&A, they likely think of large, multi-national corporations acquiring a company that has been through multiple rounds of funding and has proven successful at its craft. […]

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A Look at Average Salary Increases in PE, VC, and CVC

June 24, 2019

Average salaries in the private equity (PE), venture capital (VC) and corporate venture capital (VC) are generally high compared to other professions. How well did industry pay do last year and what is expected this years?  A look follows. Average Pay Growth in PE, VC, and CVC What is expected to happen with average pay […]

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The Top 10 Years for Financial Employment

June 10, 2019

The last couple of years have been good for the financial industry.  Financial industry employment is up 1.8 percent since the end of 2017.  Not the strongest growth rate – that title belongs to Natural Resources, Mining, and Construction at 5.8 percent – but stronger than Trade, Transportation, and Utilities, Retail Trade, and Information. The […]

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The Global League Tables are Out – Who’s on Top

May 27, 2019

The Global League Tables – those quarterly reports out of Pitchbook and affinity – are out for the first quarter of 2019. Which companies would you guess showed up on top and which were the bottom-dwellers? Here’s a look. Large Private Equity Investors Across the Globe First up, the large global private equity investors. Large […]

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New IRS Rules on Opportunity Zones Could Bring VCs Back In

May 13, 2019

New IRS Rules on Opportunity Zones Could Bring VCs Back In

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2019 Could be a Record-Breaking Year for Venture Capital

April 29, 2019

Friday’s GDP report was somewhat of a shocker.  Gross domestic product grew by 3.2%. Quite healthy by most any measure.  Contrary to popular economic opinion, economic growth is strong.  There is absolutely no evidence yet of a recession. Could the strength in the overall economy show up in venture capital markets?  The answer is yes.  […]

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An Awesome Start to 2019 – Can the String Continue?

April 15, 2019

The first quarter of 2019 was an awesome start to the year for growth equity funds.  According to data from Private Equity International, growth equity funds saw $24.9 billion in fundraising.  The $24.9 billion is the strongest start to a year in the past ten years.  Prior to 2019, the strongest start was 2011 at […]

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