What happens when venture investors have lots of money and growth prospects remain iffy?
One consequence, as covered in our free 2Q 2016 U.S. Venture Industry Report, has been late-stage private companies garnering massive amounts of VC in what seems to be the new status quo. And while unicorns have been responsible for an outsized proportion of capital raised for a while—since mid-2014—that share leaped to over 30% during 1H 2016.
Note: Much of that is due to Uber raising $5.6 billion so far this year, which in the chart below was aggregated into one big round in 2Q.
U.S. VC activity by financings of unicorns
For a quick visual comparison, unicorns accounted for...
- 30.6% of U.S. VC in 1H 2016
- 22.3% in 2H 2015
- 21.2% in 1H 2015
- 20.5% in 2H 2014
Even if we were to remove a big outlier in the dataset, Uber's $3.5 billion investment last month from Saudi Arabia's Public Investment Fund, unicorns would still have claimed about 24% of capital raised in the first half of this year. (And obviously this quick adjustment doesn't factor out the multiple $1 billion-plus rounds raised by Uber throughout 2014 and 2015.)
As our senior analyst Garrett James Black covered in the report, it’s not that investors are still foolishly pumping up a bubble, but rather that there is an overabundance of capital to be allocated to worthwhile opportunities.
This confluence inevitably has resulted in a cooling of investment frequency but not in funding size, as funds are increasingly concentrated in later-stage companies. Simply put, having already entered the high-risk, high-reward field of VC, investors are willing to tolerate greater levels of illiquidity risk, as long as it’s within a certain timeframe. The question that then ensues is that of where the tipping point for illiquidity risk is, as well as the liquidity prospects of the existing crop of late-stage, heavily funded companies.
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