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The Unicorn Effect: 39% of Venture Capital Funneled into Unicorns in 2Q, the Largest Proportion in History

July 13, 2016

The Unicorn Effect: 39% of Venture Capital Funneled into Unicorns in 2Q, the Largest Proportion in History

PitchBook releases its 1H 2016 U.S. Venture Industry Report

SEATTLE — July 7, 2016 — Unicorns, privately-held companies valued at $1 billion or more, are starting to receive the lion’s share of total venture capital invested, according to recent analysis conducted by PitchBook Data, Inc. In 2Q 2016, 39% of total capital invested into U.S. startups went into unicorn companies--a whopping $8.78 billion--compared with just 20% ($4.06 billion) in the same quarter last year, an 216% increase. This represents the largest portion of venture capital funneled into unicorns in a single quarter. This development, along with recent predictions surrounding an increase in the number of unicornsand a decline in seed/early-stage financings, signals VCs are less likely to invest in early-stage startups during the concept phase and are more likely to back mature companies with proven business models.


“Massive mega rounds for companies like Uber and Snapchat are certainly driving up the level of VC dollars invested in the market, but the mentality amongst VCs has shifted dramatically,” said PitchBook founder and CEO John Gabbert. “In years past, many investors were in bull market mode, making big bets on all types of companies. But today, VCs are more thoughtful about the types of investments they make. The decline in deal volume overall could be a result of this shift.”


VC Funding Goes to Unicorns in Record Levels


Uber, Pinterest, Snapchat and Slack are just four companies that closed VC financing in 2Q at a pre-money valuation of at least $1 billion. In May, Uber closed $5.6 billion in Series G funding at a $61 billion pre-money valuation. This round alone accounts for roughly a quarter (28%) of total invested capital in 2Q.


In addition to this surge in unicorn investments, investors like Accel Partners, Insight Venture Partners, GV and Kleiner Perkins Caufield Byers continue to pump large amounts of capital into fewer deals. In 2Q, VCs invested more than $20 billion across 1,906 completed deals, an 11% increase in overall VC invested from the same quarter last year, but a 29% decrease in terms of the number of deals completed. In 1H overall, median VC fund sizes reached the highest level in years and the median VC deal size at the early stage reached $5.5 million, the highest figure of the decade. Both of these points suggest that investors are having no trouble raising capital and are more likely to write bigger checks in order to put it to work.


Early-Stage Startups Struggle to Find Funding


Digging further into the decline in completed deals last quarter, it becomes apparent that early-stage startups are affected the most. Last quarter, the number of first financings with VC involvement dropped to 525, 38% down from the same period in 2015.


This declining appetite from investors in early-stage startups is evident in the number of seed deals in 2Q as well as follow-on funding activity:

  • Seed deal flow hit its lowest point in close to five years last quarter, after declining steadily since 3Q 2014. There were just 554 completed deals last quarter, compared to 1,098 over the same period in 2014.
  • Companies that closed a seed round are finding it more challenging than ever to close a follow-on round. So far in 2016, just 1.2% of startups with seed deals successfully closed a Series A, the lowest portion on record and a 15% drop from 2014.


“As VC fund sizes get bigger and bigger, there’s a need to write bigger checks,” said Garrett Black, senior analyst at PitchBook Data, Inc. “Combined with investors’ caution given the general macro climate, this is pushing VC money into mid-stage and late-stage financings of companies with momentum, while the seed stage is increasingly competitive and the barriers to significant institutional capital remain high. It’s never been more important for startups to focus on nailing product-market fit early, minimizing burn rates, etc., in order to increase their likelihood of receiving funding.”


Additional findings in this report include:

  • VC deal flow/total capital invested, globally and by region
  • Median fund sizes and time to close
  • Median deal sizes by financing stage
  • Most active industries for investment
  • VC exit flow, globally and by region

Download the full report here //pitchbook.com/news/reports/2q-2016-us-venture-industry-report.

For a daily dose of the latest news in the venture capital space, subscribe to the PitchBook newsletter//pitchbook.com/PEVC_News.html.


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