For the global venture capital market, Q2 2019 breaks one trend and makes another.
Using data and projections from Crunchbase, this report from Crunchbase News dives deep into the state of the global venture capital ecosystem. Here, we want to assess investment and liquidity: Money In versus Money Out.
In the Money In section, we will cover Crunchbase’s projections of how—and how much—the global venture capital ecosystem invested in Q2 2019 and in prior quarters for comparison. In the Money Out section, we’ll review acquisition statistics and highlight other notable liquidity events, including the open season on technology IPOs.
To help you digest this report, each section will contain a bullish and bearish key finding. Without further ado, let’s dive in.
- Bullish key finding. Total deal volume is up for the first time in several quarters, which bodes well for the market as a whole.
- Bearish key finding. Dollar volume growth remains stagnant across multiple stages of the investing lifecycle. Total dollar volume in 2019 is unlikely to exceed the high water mark set in 2018.
Global Funding Activity: A View From Cruising Altitude
The time between Q4 2018 and Q1 2019 marked something of a turning point for the global venture capital ecosystem.
It brought pause to a generalized uptrend in global venture dollar volume and continued a gradual recession in venture deal volume. Global data for Q2 2019 points to continued stagnation in the former but a slight recovery in the latter. This means that, in general, there were more deals struck in Q2 relative to Q1. However, on average, less money was raised in rounds across all but one stage. At the seed-stage deal and dollar volume are up, as is average and median seed deal size. That’s the outlier.
We’ll get to stage-by-stage analyses shortly, but in the meantime, let’s get a high-level snapshot of the numbers from last quarter.
Pace of Dealmaking
In Q2 2019, Crunchbase projects that just over 8,800 venture deals were struck worldwide across all stages of the private-company funding cycle. Crunchbase projections compensate for historical patterns of reporting delays, which is particularly pronounced in seed and early-stage venture.
Q2’s global deal volume is up markedly from Q1, snapping a multi-quarter slump. According to Crunchbase projections, quarter-over-quarter growth in deal volume was sufficient to reverse a year of declines, driven by an upswing in seed and early-stage deal counts. However, deal volume in Q2 2019 compared to Q2 2018 was virtually unchanged.
Projected VC Dollar Volume
Crunchbase projects that $69.8 billion was invested across deals at all stages. This figure also compensates for the known reporting delays and missing dollar amounts from many venture deals.
If two points make a line and three a trend, Q2 2019 marks the beginning of a sustained downturn in global dollar volume flowing into startup equity. The projected 1.2 percent decline in venture dollar volume from last quarter is a far smaller drop than the 20.5 percent drop between Q4 2018 and Q1 2019. Though Crunchbase projections point to a quarterly decline, however slight, it bears mentioning that those same projections suggest that dollar volume is markedly lower in Q2 2019 than in the same period of time last year, dropping 17.5 percent year-on-year.
Dollar volume declines are largely attributable to activity at the latest stages of the venture funding lifecycle. Though Crunchbase projects modest quarterly growth (on the order of a few hundred million dollars) in aggregate seed and early-stage dollar volume, the amount of capital invested in late-stage and technology growth deals (rounds labeled “private equity” raised by previously VC-backed companies) declined by a couple billion dollars, offsetting gains further down the stack.
Most Active Lead Investors
Most of the time in venture capital deals, a “lead” investor is designated (and it’s possible for more than one firm to co-lead a round).
The lead is often the firm that originated the deal, is contributing the most capital to the round, is leading the due diligence and valuation negotiation processes, and is sometimes saddled with securing syndicate partners to fill out a round. Lead investors are often granted a seat on the board of directors, giving them governance power in their portfolio companies. Together, the roles of intra-deal coordination and negotiation, followed by post-deal directorship, grant lead investors a position of serious influence on the VC landscape.
Below, you’ll find a list of the most-active lead investors from a combined set of early and late-stage deals struck in Q2. Keep in mind that not every deal in Crunchbase has a lead investor designated, and that there may be a reporting delay for certain deals.
As is the case every quarter, this list contains most of the “usual suspects” one would expect to see.
Tiger Global Management was the most frequent lead investor worldwide in Q2’s early and late-stage deals. Structured as a hedge fund, it’s unique among the firms listed here, which employ closed-end fund structures traditional to the VC sector. (Crunchbase News profiled Tiger Global Management back in February.)
At the very beginning of Q2, Andreessen Horowitz (a16z) also restructured itself, surrendering its unregulated status as a venture capital firm (which in exchange for only investing money from wealthy individuals and institutions gets reduced regulatory, disclosure, and administrative burden) to become a fully-registered investment advisor (RIA), as detailed in a lengthy Forbes profile of the firm published in April. A16z is not the only RIA in the VC game; as TechCrunch points out, Foundry Group and General Catalyst are also SEC-registered advisors. The designation gives these firms more options to invest their LPs’ capital in search of outsized returns—at the expense of the relative freedom from regulatory oversight enjoyed by less-regulated venture capital funds.
Also present among the most active investors in Q2 are corporate venture investors like Intel Capital (among the most prolific venture investors, corporate or not) and China-based Tencent Holdings. There are large, long-standing firms like New Enterprise Associates (founded in 1977) and Bessemer Venture Partners (founded as family office Bessemer Trust in 1911, but opened up a venture fund in Silicon Valley in 1974). Sequoia Capital (founded in 1972) also makes several appearances on this list by way of its primary Menlo Park outfit and global network funds based in India and China.
And we’d be remiss not to mention SoftBank, a Japanese telecoms conglomerate. The company has a long history of making venture investments directly out of its own coffers, and it serves as the principal manager and second-largest backer of the SoftBank Vision Fund, a nearly $100 billion capital pool administered by London-based SoftBank Investment Advisors. For its supergiant deal-making, SoftBank will sometimes invest its own money and later transfer the position to the Vision Fund portfolio. Other times, the Vision Fund (SoftBank Investment Advisors) will invest directly.
Founded in 2018, Bethesda, MD-based Northpond Ventures is the youngest firm featured on this list.
If you’re interested in U.S.-specific round leadership data that’s relatively recent (compiled on June 10, 2019), consider reading Joanna Glasner’s article published on Crunchbase News. In a follow-up piece, she highlighted the most-active investment firms that were founded within the past decade.
Stage-By-Stage Analysis of Q2 2019 VC Funding Trends
In our stage-by-stage analysis, we’ll start close to the entrepreneurial metal with seed-stage deals. From there, we’ll proceed up the capital stack, ending with the late-stage venture and pre-IPO private equity deals that typically cap off the financial histories of private companies before they graduate to raising from public markets.
It’s at the seed stage where we find the only real bright spot in this quarter’s global investment numbers. This stage includes rounds labeled “seed,” “pre-seed,” “angel,” and a subset of other round types. (More information can be found in the Methodology section at the end.)
Crunchbase projects that, worldwide, approximately $3.92 billion was invested across 5,481 seed-stage deals in Q2 2019. Q2’s projected deal and dollar volume are up significantly from Q1 2019 and are up year-on-year as well.
Not pictured in the chart above is a geographic breakdown of seed-stage deal and dollar volume, and within these numbers we find a trend.
According to Crunchbase projections, companies based in the U.S. and Canada accounted for just over 41 percent of global seed-stage dollar volume in Q2 2019, down from 50 percent in Q2 2018. Similarly, with deal volume, the rise of the rest of the world continues: companies based outside the U.S. and Canada raised 66.9 percent of seed-stage deals, compared to 59.5 percent of deals the same time last year.
In other words, the upswing in global totals for seed-stage deal and dollar volume is being driven by markets outside the U.S. and Canada.
Seed is also the only stage where we see quarterly gains in both mean and median round size.
Averages can be skewed by outliers. Upward movement in median deal size indicates a population-wide change. This all points to the shifting semantics of “seed,” and it appears to be a global phenomenon. Year-over-year, the average seed round size is up 60 percent worldwide and up 66 percent for U.S. and Canadian startups alone. Worldwide, the median seed-stage deal is now 80 percent larger than in Q2 2018; the median seed-stage deal in the U.S. and Canada ($1.4 million in Q2 2019) is up 180 percent from approximately $500,000 in Q2 2018.
So what’s going on? In a word, stratification. There was a time when “seed” definitively meant something like “the first institutional check raised by a new startup, typically in an unpriced round, prior to raising a Series A round.” (Traditionally, a Series A round is when the price of a startup’s stock is first established during the valuation process.)
Now, it’s not so cut and dry as professional startup investors are writing checks to ever-earlier-stage startups. Between the money raised from friends and family (which is rarely captured in investment datasets), wealthy angels, accelerator programs, and dedicated pre-seed funds, a founding team could have raised tens or hundreds of thousands of dollars from investors—buying them time and early traction—before setting out to raise a “seed” round.
Seed investors, once reliably the first money into a startup, can now invest more because an increasing portion of their deal-flow comes pre-filtered by upstream capital providers.
Crunchbase projects that $27.63 billion has been invested across 2,695 early-stage deals in Q2 2019.
The following will become a recurring theme throughout the remainder of the report: worldwide, deal volume is up, but dollar volume remains basically flat relative to the prior quarter. It’s true at early-stage and beyond. (“Early-stage” deals include all Series A and Series B rounds, plus a subset of other round types within a certain range of funding raised in the transaction.)
Early-stage deal volume appears to be reversing a roughly year-long downtrend, which comes as good news for an uncertain segment of the startup equity market. This appears to be driven largely by international growth.
In Q2 2018, startups outside the U.S. and Canada accounted for 50.6 percent of all early-stage deal volume; in Q2 of this year, this same cohort of global startups raised 58 percent of early-stage deals. Here too, the center of gravity is shifting outside the U.S. and Canada.
In prior quarters’ reports, we’ve discussed the long-term implications of these declines. Just as fewer seed rounds could portend a pull-back in early-stage deals, so it goes that a decline in early-stage deals results in constrained late-stage deal flow down the road. To be a signal of market strength, though, we’d need to see continued growth in subsequent quarters, or else this high note is just statistical noise.
And although a resurgence in early-stage deal volume is bullish news, it is paired with negligible growth in dollar volume. This brings average round size down slightly from last quarter, but early-stage median deal size is still on the rise.
Worldwide, average deal size at the early stage has fluctuated between $10.2 million and $17 million over the past two years. (Note: numbers for Q2 2017 through Q1 2018 are not pictured in the chart above.) The trendline is still generally upward, even if on a quarter-to-quarter basis there are ups and downs. In Q2, Crunchbase data indicates that, relative to Q1, average deal size shrank by 8.8 percent to $15.5 million; however, compared to the same time in 2018, the average grew by 34.8 percent. It’s two steps forward and one step back.
Growth in worldwide median early-stage deal size, however, has been much more straightforward, literally. Worldwide, there hasn’t been a quarterly decline in median early-stage deal size since Q4 2017, which was $5.1 million according to Crunchbase. Fast forward to Q2 2018 and the median early-stage deal was $5.5 million. In Q2 of this year, that grew by 45.5 percent to $8 million.
Again, this indicates a worldwide shift in early-stage dealmaking. Though most of this growth appears to be driven by the U.S. and Canadian startup market (where median deal size is up 88.7 percent year-over-year) median round size in the rest of the world is also up, albeit by a comparatively more modest 12 percent from Q2 2018.
Late-Stage Venture & Technology Growth Deals
In prior quarters, huge late-stage and technology growth deals dominated the headlines and bent the curve of the startup investment market upward. This quarter, not so much. The story with the later stages of venture finance is very similar to what’s happening earlier on. Deal volume is up; dollar volume is down (slightly).
Crunchbase projects that there was a total of $38.25 billion in combined late-stage and technology growth (private equity transactions raised by previously VC-backed companies) dollar volume across 641 deals.
Of these combined figures, late-stage deals account for the surpassing majority of both deal and dollar volume. (Crunchbase defines late-stage as the set of rounds including Series C, Series D, Series E, and beyond, plus a subset of rounds from other transaction types.)
Though deal volume mostly recovered from a significant dip between Q4 2018 and Q1 2019, Q2 2019’s deal volume is effectively unchanged from the same period of time last year, which remains a local maximum for late-stage investment counts since the end of the first dot-com bubble in the early 2000s. It’s possible that the global venture market has hit a plateau of sorts, at least with respect to deal volume.
Relative to the same period last quarter, late-stage dollar volume shrank back by 2.4 percent, a relatively small setback given the wild swings just a few very big rounds can introduce to these numbers. On a year-over-year basis, however, late-stage dollar volume presents slightly more disappointing results, declining by a third relative to Q2 2018.
And here is deal and dollar volume, charted for “technology growth” rounds. Typically, we include these deals mostly for the sake of completeness in reporting. But in Q2 they really matter in the broader context of this quarter’s numbers.
Because technology growth deals are relatively few and far between, it’s hard to place too much analytical weight on its deal and dollar volume trends. However, in terms of absolute value, the often large-dollar nature of late-stage PE deals means that they can swing the overall numbers by a fair bit. And that’s what happened in Q2, with a $1.31 billion decline relative to Q1.
In other words, given the small-dollar sums at seed-stage—plus stagnation at early and late-stage—a slump in technology growth dollar volume is the unlikely driver of declines in overall dollar volume. Projected seed-stage dollar volume is up by a bit over $650 million; early-stage dollar volume is up $700 million; and late-stage dollar volume is down $860 million, offsetting all early-stage gains. The loss of $1.31 billion in tech growth dollar volume wiped out any remainder and then some.
Tech Growth And Late-Stage As A Stronghold For U.S. And Canadian Venture
Taken together, late-stage venture and technology growth is where U.S. and Canadian startups are gaining (or at least holding) their ground relative to international ventures. U.S. and Canadian startups accounted for 50.9 percent of the combined late-stage and tech growth dollar volume in Q2 2019, up from 31.8 percent in Q2 2018. The resurgence in North American latter-stage venture dollar volume primarily comes at the expense of Chinese startups, which were many of the most-funded companies from quarters past are headquartered.
The tables have turned. According to a Crunchbase Pro search four of the ten largest late-stage VC rounds struck between 2018 and the end of Q1 2019 were raised by Chinese tech companies; just one U.S. venture round, smart glass-maker View’s SoftBank-led Series H, made that cut. In Q2 2019, four of the ten largest late-stage rounds were raised by U.S.-based companies, with just one Chinese company, Megvii, making the top ranks last quarter.
- Bullish key finding. Given the history of declining M&A deal volume, sideways momentum beats a continued downturn.
- Bearish key finding. High-flying private valuations are facing the tough scrutiny of public market investors.
The venture game is one of risk, return, and often dead reckoning toward an exit.
In general, there are only a few ways for money to get out of a privately-held company. We’re talking about risk capital here, so failure is always an option. This, of course, is not ideal. But especially at the earliest stages, fizzling out due to a dearth of funds is a grim reality for many founders. Those early years are called the “valley of death” for a reason.
Startups burn through heaps of investor cash in the name of building value, so how do stakeholders realize that value? The most common exit path is via merger or acquisition, the other is to turn shares in a privately-held company into shares in a publicly-traded company. Traditionally, that’s via an initial public offering, but some notable upstarts—like Slack—are looking to bypass the bankers by listing their shares directly on a stock exchange.
Crunchbase data signals some strength in venture-backed M&A activity. Now, obviously, there were more than 357 M&A transactions in Q2, but the universe of companies with known venture backing which were privately-held at the time of the M&A transaction is relatively small. However, from this limited subset of deals we can see some trends.
M&A deal volume is relatively flat, both on a QoQ and YoY basis. For any other metric in this report, deal volume doldrums like these would disappoint. (Dollar volume matters less as a metric because just a few really big deals can skew these numbers significantly.)
In prior reports we’ve highlighted declines in M&A deal volume as a problem facing startups and their investors alike. It was particularly problematic when the IPO market was a lot slower, but now that that side of the liquidity equation has opened back up, investors and their portfolio company teams can find upside even in a sideways M&A market.
Initial Public Offerings
There’s this saying: “The IPO window is open.” In Q2, public markets, especially in the U.S., had to open a barn door to fit all the quarter’s big offerings through.
Years of speculation about many of our favorite brand-name ventures came to an end. What happens when Uber goes public? Slack? Pinterest? Zoom? Tens of billions of dollars worth of pent-up private-market value finally made Wall Street debuts this quarter.
Though there aren’t any Uber-scale ventures on the docket to go public in Q3 (at least not yet) the current quarter is likely to provide a similarly favorable market to new offerings, barring the non-zero chance of macroeconomic turbulence.
A Small Note About Secondary Market Transactions
There is a fourth way: what’s known as a secondary market transaction. The sale and transfer of existing private company stock is rarely reported publicly and, accordingly, is difficult to track in any dataset of venture capital transactions.
As interesting as this exit path would be to cover with greater depth and frequency, there isn’t much available data on the numerous small-dollar transactions which take place directly between shareholders, or which get mediated through a private stock marketplace platform, broker-dealer, or dedicated secondary purchaser.
When news of big secondary market transactions does come out, it’s typically only for big deals. A prime example of this from Q2 is the $292 million stock sale by TransferWise in May. The deal gave “hundreds” of employees and some of its prior investors time to liquidate some or all of their positions, according to Crunchbase News, Reuters, and MarketWatch, among other outlets. Reading between the lines this helped the company clean up its capitalization table. Though such financial tidy-up might be construed as pre-IPO prep, Forbes reported that the company didn’t intend to go public “anytime soon.” By offering liquidity to employees and early investors, its capital consolidation was similar to an IPO in function, if not in form.
As more startups enter the latter stages of the private-company lifecycle, keep an eye out for more novel ways in which founders and first funders find a path to liquidity.
What It All Means
Q2 brought many investors the moments they’ve been looking forward to for years. To all of those who exited with some upside, congratulations.
Public-market debuts are great for folks who were able to get money out of those ventures. However, for prospective backers of similar businesses and founders looking to start up in a sector “disrupted” by one of the new incumbents, greater transparency into new business models is double-edged.
Many of the companies which just went public (or are on the shortlist of IPO candidates for the remainder of 2019 and into 2020) got big by pioneering new service models attempting to capitalize on changing patterns of behavior brought about by economic conditions (the Great Recession resulted in a lot of folks willing to do on-demand “gig economy” work in the absence of more traditional employment) and changing patterns of technology use.
An example: Uber, founded in early 2009, utilized a core location API that was only added to iOS one year earlier. In this lens, mobile-enabled on-demand transportation seems inevitable. Smartphones as we know them today (pocketable glass and metal silicon sandwiches) have only been around for a dozen years or so. That’s just over the typical 10-year lifespan of a closed-end venture capital fund.
The point here is that new service models built on new technology can prove to be valuable. But the transparency of public-market reporting brings up another question: sure the service is valuable, but what’s the value of the business built around it? The challenge for market entrants is that public-market comparables are no longer theoretical. Privately-held, on-demand transportation companies will be valued against the very real metrics reported by Uber and Lyft. Pure-play workplace collaboration upstarts will be assessed against the likes of Slack and Zoom. No longer subject to speculation, benchmarks are now concrete.
As the wave of massively-funded private companies breaks into public markets, expect a fair amount of foam. This too will subside at some point. Flatness now may just be a trough between swells. It’s too early to tell if the tide is going out.
The data contained in this report comes directly from Crunchbase, and in two varieties: projected data and reported data.
Crunchbase uses projections for global and U.S. trend analysis. Projections are based on historical patterns in late reporting, which are most pronounced at the earliest stages of venture activity. Using projected data helps prevent undercounting or reporting skewed trends that only correct over time. All projected values are noted accordingly.
Certain metrics, like mean and median reported round sizes, were generated using only reported data. Unlike with projected data, Crunchbase calculates these kinds of metrics based only on the data it currently has. Just like with projected data, reported data will be properly indicated.
Please note that all funding values are given in U.S. dollars unless otherwise noted. Crunchbase converts foreign currencies to US dollars at the prevailing spot rate from the date funding rounds, acquisitions, IPOs, and other financial events as reported. Even if those events were added to Crunchbase long after the event was announced, foreign currency transactions are converted at the historic spot price.
Glossary of Funding Terms
- Angel & Seed-stage is comprised of seed, pre-seed, and angel rounds. Crunchbase also includes venture rounds of unknown series, transactions of undisclosed type, and convertible notes totaling $1 million (USD or as-converted USD equivalent) or less. Equity crowdfunding rounds with no listed dollar value, as well as those totaling less than $5 million, are also counted as seed-stage.
- Early stage is comprised of Series A and Series B rounds, as well as other round types. Crunchbase includes venture rounds of unknown series, transactions of undisclosed type, and convertible notes totaling between $1,000,001 and $15,000,000. Convertible note rounds with missing dollar values are also counted as early-stage.
- Late stage is comprised of Series C, Series D, Series E, and later-lettered venture rounds following the “Series [Letter]” naming convention. Also included are venture rounds of unknown series, transactions of undisclosed type, and convertible notes of $15,000,001 or more.
- Technology growth is a private equity round raised by a company that has previously raised a “venture” round. (So, basically, any round from the previously-defined stages.)
These classification rules differ slightly from those used in Crunchbase Pro, which does not include the subsets of series-unknown, equity funding of undisclosed type, convertible notes, or equity crowdfunding rounds.