Venture capital (“VC”) investment experienced pull back in the third quarter, following an exceptional second quarter and a robust first half of 2014. According to the PricewaterhouseCoopers / National Venture Capital Association MoneyTree™ Report, VC activity in the United States decreased about 24% in the third quarter to $9.9 billion, down from $13.0 billion in the second quarter.
Although, a sharp decrease from the second quarter, market participants can still be optimistic as activity in the third quarter is up 24% year-over-year. Total investment through the three quarters of 2014 is $32.4 billion which far exceeds 2013’s total of $29.6 billion. The average deal size was down a bit in the third quarter from the second quarter ($9.7 million vs. $11.6 million, respectively) but overall the trend towards larger deals continues as deal size in 2014 is significantly higher than long term averages. There was a total of 1,023 deals completed, compared to 1,114 in the second quarter. Seed funding increased in the third quarter but investment is still most heavily concentrated in expansion stage entities.
The software industry continues to lead in attracting VC investment, but its overall share decreased significantly from previous periods. In the third quarter, software accounted for 37% of the investment, down from 47% in the second quarter, but in line with the 37% for all of 2013 (see our 2014 Venture Capital Investment Q2 Update and our 2013 Venture Capital Investment: Year in Review). The dollar decrease in Q3 can be partially attributed to the record-breaking $1.2 billion dollar investment that San Francisco-based software company, Uber received in Q2. The Uber deal made up 20% of the Q2 software investments and 9% of total Q2 investments. Although software saw no record investments in Q3, it leads all Q3 investments with $3.7 billion spread among 418 deals. Media and Entertainment has surpassed Biotechnology for second place, capturing $1.8 billion in the third quarter:1
Geographically, California (1) and New York (2) lead the nation in VC investment. California received almost $5.2 billion in VC funding, spread over 438 deals (about $11.9 million per deal). New York received over $1.5 billion in VC funding, averaging $13.9 million per deal over 107 deals.
Colorado, Missouri, and Kansas ranked 7th, 16th, and 24th, respectively, in amounts invested. The following table highlights the third quarter 2014 VC investments for these selected states:
For Colorado and Kansas, this level of activity represents an improvement over the second quarter. Missouri saw a decrease in overall investment, but an increase in the number of deals. Totals for the first three quarters of 2014 are:
We will continue to monitor the levels and trends in VC investment and what they mean for life sciences and technology related industries and the overall economy. RubinBrown has a dedicated Life Sciences and Technology Services Group that works with local, national, and international companies to provide advisory, assurance, and tax services for entities participating in or supporting life sciences and technology industries.
1The MoneyTree™ Report provides definitions for each industry classification. All Other Industries includes the twelve other MoneyTree™ Report industries of: Business Products and Services; Computers and Peripherals; Consumer Products and Services; Electronics/Instrumentation; Financial Services; Healthcare Services; Networking and Equipment; Retailing/Distribution; Semiconductors; Telecommunications; and Other.
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