January 18, 2016
Our 2015 Annual U.S. Venture Industry Report delves into a variety of metrics to determine whether 2015 was truly a peak year for U.S. VC, covering financing by sector and stage, exit activity, fundraising and more. One of the more specific topics covered is the proportion of up, down and flat rounds over the recent past, and how to assess the overall confidence of investors using that information. Below is an excerpt from the full report:
Looking at yearly numbers, the sheer proportion of up rounds in 2015 is staggering. 67% of U.S. venture rounds this past year were up from the immediately prior financing, easily the highest percentage seen in at least a decade. Yet, as we’ve seen, strong numbers earlier in the year have boosted overall 2015 totals; the mild uptick in the proportions of flat and down rounds in 4Q is more telling in conjunction with the recent slide in venture activity. In fact, the total number of up rounds in 4Q was the smallest in years, which is somewhat obscured by the overall percentages. But it’s important to bear in mind that the outsized proportion of up rounds, coupled with the decline in the number of financings, speaks more to investor caution in the current scene than anything else. In short, the companies that are still being funded nowadays tend to exhibit stronger financial fundamentals and growth prospects than previously. VC firms are growing more selective, taking burn rates with a grain of salt and, at the late stage, demanding more protective provisions. It’s uncertain for now whether flat or down rounds will increase in frequency, but as a correction in the venture market continues to play out, it’s more likely than not that they should somewhat, although the extent is unlikely to be dramatic. What is likelier is the preponderance of up rounds plateauing, rather than marching relentlessly upward. Even if VC activity picks up again, a delayed reaction taking the form of decreased round sizes will trail behind dealmaking levels.
Note: up, flat or down rounds are determined by the size of the round, i.e., a round is up if it is greater in size than the previous financing round.
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