If you’re looking for venture capital (VC) to fund your startup, you need to know the pulse of the current market. For the past several years, the total dollar amount of VC given to startups has increased significantly, with increased interest in new technologies and potential “unicorns” which could be valued at a billion dollars or more.
But what do the latest statistics indicate about the state of the VC world and what can you do to make the most of it?
1. Total VC funding dollars are down 11 percent.
VC rates exploded in the early 2010s, rising from less than $15 billion in funding and around 2,500 VC deals closed in Q1 2010 to a peak in Q1 of 2015 for deals closed (with nearly 5,500) and a peak in Q2 2016 for total amount funded (with over $45 billion). Some economists have speculated that this was just a middle step in a much larger run of upward momentum, while others suggested it was a sign that the tech industry was in a bubble of valuation, which was about to burst.
Neither seem to be the case; 2016 was clearly a peak, but one that has since started to slowly calm down. Comparing Q2 2016 (the clear peak) to Q2 of 2017, the total dollar amount of funding given has fallen 11 percent, to $40 billion.
The total number of closed deals has fallen similarly, from around 3,700 to less than 3,000. From the peak in Q1 2015, that’s a fall of nearly 43 percent.
2. The global median deal size is now $10.8 million for late-stage VC.
Median deal sizes have increased steadily since 2010, with $0.5 million, $2.5 million and $5.5 million as median deal sizes for angel/seed funded companies, early stage VC rounds and late stage VC rounds respectively. In 2017, those median deal sizes increased to $1.0 million, $5.0 million, and $10.8 million, respectively, doubling or nearly doubling in all cases.
When you break down the funding by series, the difference is even more pronounced, with the median series A funding rising from $2.5 million to $6.0 billion and series D (and later stages) rising from $12.0 million to over $40.0 million, more than tripling.
This is an indication that VC funding is gravitating more toward bigger, more stable, more promising deals and away from smaller, riskier ones.
3. Unicorn valuations are inflated by 50 percent.
Recent research by the University of British Columbia and Stanford suggests that on average, unicorns (i.e., private companies valued at $1 billion or more) are overvalued by 50 percent. The research looked at current valuations for 135 United States-based unicorns, 15 of which were valued at a price 100 percent or more above their fair market value.
The research compensated for factors like distinctions between common and preferred shares, riders, cash flow, control rights and IPO return guarantees.
So what does this mean for the world of VC and VC hopefuls? It’s further evidence that our startup valuations are somewhat unjustly disproportionate, and that unicorns aren’t really as common as they seem to be.
However, it also means that the possibility of becoming a unicorn, at least in name, is higher than it should be.
4. VC funding for AI and machine learning nearly doubled.
In 2017, VC investors poured more than $10.8 billion into startups that focused on artificial intelligence (AI) and machine learning. Compare that to just $5.7 billion in 2016, and only $500 million back in 2010.
Companies from all over the world, including NIO (in Shanghai), Face++ (in Beijing), sensetime (in Hong Kong) and Indigo (in Boston) each received hundreds of millions of dollars in funding for applications like autonomous vehicle research, facial recognition and agriculture.
Obviously, AI has become a hot ticket investment platform for VCs everywhere, which means any startup you attempt to create with a machine learning foundation likely has a higher chance of getting funded.
What does the future hold for VC trends? If the pattern continues, we’ll see an even bigger decrease in the number of deals and the total dollar amount funded (though not to the extent it can be considered a “burst bubble), growth in the median deal size across all funding rounds, growth or stability in overvalued unicorns, and even more funding for startups focusing on machine learning and/or AI.
It’s still an exciting time to be a startup tech entrepreneur, though the dynamics are changing. Stay up-to-date with the latest trends, and position yourself accordingly.
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