UPDATED 00:01 EST / JANUARY 14 2020

sandhill EMERGING TECH

Venture capital investments and startup exits slow but remain near record highs

Venture capital investments in the U.S. may be slowing a bit, and so are startup “exits” such as initial public stock offerings and acquisitions, but both remain near record highs as investors keep betting on continued growth in the tech sector.

That’s the upshot of two different reports on the VC and startup funding business that were released tonight. They also found, not surprisingly, that software and internet companies, particularly cloud software-as-a-service companies, dominated the venture investing field.

According to data published in the quarterly PitchBook-NVCA Venture Monitor, venture capital funding closed above $130 billion for the second straight year and overall exits hit a new high. VC investments in the fourth quarter of 2019 came in at $34.2 billion invested across 2,215 deals, bringing the total for 2019 to $136.5 billion across 10,777 deals.

The overall number was down from $140.2 billion invested in 2018. The investment market, as noted in the third-quarter figures, is slowing somewhat, but the level is still at near-record highs.

Another tally, from the PwC/CB Insights MoneyTree Report, showed much the same trends, albeit with somewhat different numbers. That report says fourth-quarter U.S. VC funding fell 9% from a year ago, to $108 billion, while the number of deals fell almost 10% from a year ago, to 1,324.

Although so-called “mega-deal investments” dominated the year, investment rose across the board. Some 237 mega-deals, investments of more than $100 million, were recorded during the year, up from 212 last year, according to PitchBook/NVCA, while PwC/CB Insights pegged the total at 213. Valuations on all rounds also rose, according to PitchBook/NVCA, with the average deal valuation coming in at $8 million for angel and seed rounds, $29.4 million on early VC and $88 million on late VC rounds, all three the highest levels ever recorded.

The amount invested in angel and seed rounds in 2019 came in at $9.1 billion, slightly down from the record $9.2 billion invested last year, with the number of deals remaining steady at 4,556. While possibly reflective of a slight slow down, startups are also waiting longer to raise angel and seed capital with the 75th percentile and median coming in at 5 years and 2.9 years respectively, the latest ever recorded and nearly double the figures from 2012.

Where money was invested also shifted through the year with companies in the Mid-Atlantic region, which includes New York City, obtaining 24.2% of venture capital in 2019 versus 14.5% in 2018. The West Coast, by comparison, saw its deal value drop from 62.3% to 50.2% of the overall market.

By market segment, software companies not surprisingly continued to lead the pack with $43.5 billion invested in 2019, although the number of deals dropped slightly from 2018. Health tech booked $7.6 billion in VC during the year, its highest ever recorded on 658 deals, also a new record. As PwC/CB Insights noted, the top U.S. VC deal in the quarter was Minneapolis-based health insurance company Bright Health Inc., which raised a $635 million Series D round.

Cybersecurity saw $5 billion invested in the year, also a record, although the number of deals remained flat as rounds became bigger. Pharma and biotech went in the opposite direction. Although it recorded its highest-ever number of deals with 866, the amount invested came in a $16.6 billion, down from $18.6 billion in 2018.

Exits

In the fourth quarter, exits — meaning initial public offerings of stock as well as mergers and acquisitions — came in at $18.8 billion across 174 deals. That was down from $35.4 billion in exits during the previous quarter and the second straight quarter the figure has declined. The largest exit in the fourth quarter was PayPal Inc.’s acquisition of Honey Science Corp. for $4 billion in November.

In 2019 in total, exits came in at a record high of $256.4 billion across 882 liquidity events. IPOs were the primary driver behind the record figure even though IPO activity dropped off in the fourth quarter.

The drop is attributed to the lackluster performance of some IPOs putting a damper on other companies going public. Direct listings were also noted to have gained momentum in 2019, with the report predicting that the method of taking companies public will likely find more favor among unicorns in the year ahead as an alternative to a traditional IPO.

Venture capital funds raised $45.1 billion across 258 vehicles in 2019, the second-highest level raised by VCs in the last decade but down significantly from the $58 billion raised in 2018. While direct fund raising declined, the funds themselves grew to a median size of $77 million in the year thanks to strong distributions elevating net cash flows.

“2019 showed that industry trends from the historic 2018 are the new normal for the venture industry, with mega-rounds and mega-funds becoming increasingly common trends in the startup ecosystem,” Bobby Franklin, president and chief executive officer of NVCA, said in the statement. “While there are lingering uncertainties surrounding global macroeconomic trends, U.S. public policies and the 2020 election that could impact the industry, the flood of exit dollars going back to LPs, the robust fundraising environment, and large amounts of dry powder available at many venture firms should allow the industry to sustain this new level of investment activity in 2020.”

With reporting from Robert Hof

Photo: Coolceaser/Wikimedia Commons

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