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Focus on Life Sciences & Technology: 2017 Venture Capital Investment – First Quarter Update

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U.S. venture capital (VC) investment rebounded slightly in Q1 2017 after a fourth quarter slide to close out 2016. Q1 2017 deal count rose by nearly 18%, while dollars invested grew by over 15%, versus Q4 2016. Despite the promising first quarter performance, recent venture activity has struggled to return to 2015’s record levels.
April 25, 2017

U.S. venture capital (VC) investment rebounded slightly in Q1 2017 after a fourth quarter slide to close out 2016. Q1 2017 deal count rose by nearly 18%, while dollars invested grew by over 15%, versus Q4 2016. Despite the promising first quarter performance, recent venture activity has struggled to return to 2015’s record levels (see 2016 Venture Capital Year in Review).

 


 

 

Early stage, expansion stage and later stage all garnered higher levels of investment in Q1 2017 versus Q4 2016, up over 7%, 53% and 35%, respectively. Only seed stage funding did not recover, falling just over 18% quarter-over-quarter. Q1 2017 investment levels for early stage and expansion stage companies beat their respective five-year averages by 10% and 16%, while seed stage and later stage funding underperformed their respective five-year averages by 5% and 6%.

Despite an improved Q1, the overall downward trend, beginning in mid-2015, in funding for later stage companies reflects the trend in VC of declining exits. According to Pitchbook, exits recently peaked in 2014 with 1,049 exits, and declined in 2015 to 970 (-8%) and again in 2016 to 787 (-19%). With 169 Q1 exits, 2017 is on pace for 676 exits, another 14% decline from 2016 (Pitchbook & NVCA 1Q 2017 Venture Monitor Report).

Comparing first quarter VC investment by sector year-over-year, the internet sector continues to lead in attracting VC investment. Notably, the software (non-internet/mobile) sector grew over 47% year-over-year, capturing almost double the market share in Q1 2017 as it did in Q1 2016. The top five sectors accounted for 90% of all VC investment during Q1 2017, up from their 86% share in Q1 2016. To see our recent analysis of funding for the AgTech industry, see Focus on Life Sciences and Technology: 2016 AgTech Investment.

 

 

Geographically, California (1) and Massachusetts (2) led the nation in VC investment. California received $7.4 billion in VC funding (53% of US total), spread over 437 deals (40% of US deals), a healthy $16.9 million per deal. Massachusetts, at second, received over $1.8 billion in VC funding (13.1% of US total), averaging $19.2 million per deal over 95 deals (9% of US total).

Regionally, Colorado, Missouri, Nevada and Kansas ranked 4th, 22nd, 28th and 42nd, respectively, in amounts invested. The following table highlights Q1 2017 VC investments for these selected states: Colorado, Missouri and Nevada all bounced back from low-performing fourth quarters, but Kansas garnered zero VC investment.

 

 

While exit activity has been slowing, the revitalized flow of investment to early stage companies is hopefully signalling a slowing or potential end to the declines in investment. In addition, 2016 saw a healthy flow of capital into VC funds, which will need to be deployed over the next couple of years. We will continue to monitor and report on venture activity.

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.

 

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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