Emerging venture trend: earlier stage, higher quality

Dow Jones VentureSource just released their Q3 quarterly findings.  I love the data, but sometimes looking at it quarterly allows noise to cloud what the data is telling you.  I prefer to look at the data on a last twelve months basis so you can see trends that aren’t impacted by outliers.  Below is the data for new VC funds raised and total VC funds deployed (in other words, VC deals done).      

 

VC FUNDS RAISED LTM Q3 2015 LTM Q3 2016 LTM Q3 2017
Amount Raised ($mm) $37,850 $43,500 $41,110
YOY Change --- 15% -5%
Funds 381 458 576
YOY Change --- 20% 26%
Avg Fund Size $99 $95 $71
YOY Change --- -4% -25%
       
VC FUNDS DEPLOYED LTM Q3 2015 LTM Q3 2016 LTM Q3 2017
Amount Raised ($mm) $75,700 $65,310 $62,560
YOY Change --- -14% -4%
Number of Deals 4499 4244 4178
YOY Change --- -6% -2%
Avg Deal Size $16.8 $15.4 $15.0
YOY Change --- -9% -3%

 

-VC funds raised in the past twelve months total $41bln, a negligible decline from the prior 12 months which saw $44bln raised.  That capital was spread over a large number of funds however, as 576 funds were raised in the past twelve months versus 458 funds in the prior twelve months and 381 funds in the LTM period ended Q3 2015.  These are material changes in my view, and as a result the average fund size in the last twelve months is down to $71mm, from $95mm in the prior 12 months.  That means more small funds are being raised versus larger ones, which implies more capital going into the earlier stage deals going forward versus later stages.   

 

-The amount of VC funds deployed, or VC deals done, declined to $63bln versus $66bln in the prior 12 months.  While that isn’t a material change, it does represent two back to back annual declines since LTM Q3 2015 saw $76bln worth of deals done.  In our view this trend is worth noting, especially if it persists.  The number of deals done also declined to 4,178 from 4,244.  Again not a material change, but it does represent a back to back decline.  We believe these declines could be an indication that the venture market is becoming pickier on the deals they select. The average deal size has declined some as a result to $15.0mm, but not appreciably.  With average deal size being so high though, clearly it’s a sign that the data is skewed to later stage deals.  As such, we don’t pay much attention to average deal size due to the bias (indeed, according to the DJ report, the median deal size has hovered around ~$5.0mm since Q3 2014).

 

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