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Focus on Life Sciences & Technology: 2016 Venture Capital Investment – Third Quarter Update

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Third quarter 2016 U.S. venture capital (VC) results show a continuation of the downward trend in VC activity that started in mid-2015. Both investment and deals were down this quarter, with amounts invested dropping significantly, down 32% from the prior quarter and down 36% year-over-year. Third quarter investment of $10.6 billion was the lowest level of investment since the third quarter of 2014.
October 17, 2016

Third quarter 2016 U.S. venture capital (VC) results show a continuation of the downward trend in VC activity that started in mid-2015. Both investment and deals were down this quarter, with amounts invested dropping significantly, down 32% from the prior quarter and down 36% year-over-year. Third quarter investment of $10.6 billion was the lowest level of investment since the third quarter of 2014. On a national level, the slowdown in venture activity that began in the second half of 2015 has continued (see our 2015 Venture Capital Investment: Year in Review and the 2016 Second Quarter Update). Venture activity peaked in the second quarter of 2015 and has trended down since then.

 

Another continuing trend is that the slowdown is being felt disproportionately by earlier stage companies. Expansion and later stage companies are attracting most of the investment (63% of capital in the third quarter 2016)1.  Average deal size remains elevated too, though down from the prior quarter. The average deal size was $11.9 million in the third quarter, well above the 5-year average.

 

Looking at VC investment by industry, the software industry continues to lead in attracting VC investment, but demand cooled significantly in the third quarter. Software investment, at $3.7 billion in the third quarter 2016, dropped 58% from the prior quarter ($8.8 billion) and only accounted for 35% of all investment, down from 57% in the second quarter 2016. It is important to note that software investment was extremely strong in the second quarter, so this pullback is not too surprising. Biotechnology captured the second largest share at 17%, with $1.8 billion, up 5% from the second quarter ($1.7 billion).

 

Geographically, California (1) and Massachusetts (2) lead the nation in VC investment. California received $5.3 billion in VC funding (50% of U.S. total), spread over 338 deals (38% of U.S. deals), a healthy $15.6 million per deal. Massachusetts, at second, received over $1.7 billion in VC funding (16% of U.S. total), averaging $20.1 million per deal over 84 deals (9% of U.S. total).  

Regionally, Colorado, Missouri and Kansas ranked 9th, 18th and 42nd, respectively, in amounts invested. The following table highlights third quarter 2016 VC investments for these selected states:

 

Missouri and Colorado actually bucked the downward trends and experienced increases in overall investment compared to the second quarter of 2016.

The slow-down continues and is now over a year old. Notably, it appears to finally be impacting West Coast markets too. However, as we have stated, it’s important to keep in mind that that VC activity remains relatively robust when looking back over the past 15-years during the post dot-com bubble era. We will continue to monitor the levels and trends in VC investment and what they mean for life sciences and technology related industries, valuations 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.

 

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1 PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report Data

 

Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.

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