Q1 2018 VC investing hits highest level since 2006, with $28.2 billion deployed

The number of deals continued to drop, resulting in larger deal sizes and fewer exits

A couple of years ago, when the tech bubble seemed like it had finally burst, or at least it had begun to deflate, there was a strong possibility that we might be in for a few years of companies struggling to get funding. That turned out not to be the case; while late 2016 and early 2017 saw things slow down significantly in terms of the capital being deployed, they have since come roaring back to life in the past year.

In fact, the first quarter of 2018 hit a 12 year high according to the 1Q 2018 PitchBook-NVCA Venture Monitor report released on Tuesday. That follows a record breaking 2017 in which VCs have invested more than $148 billion. 

In all, investors put $28.2 billion into 1,638 deals during the first three months of the year, which is the highest amount of capital deployed in a single quarter since 2006. It's also the fourth quarter in a row to see at least $20 billion invested. Even more impressive: there was more capital invested in just the first quarter of 2018 than in the entire year of 2009, the height of the Great Recession.

Venture capital is not only back but it's stronger than it has been in many years. 

Since there's more money being put into the ecosystem than there has been in years, that should means that it should be easy for companies to raise funding, but it's not really turning out that way. While there's more money being deployed, there are also fewer companies raising more money, resulting in larger deal sizes. Investors seem to have no problem writing checks, but they do seem to be pickier about which companies get access to those funds. 

The first quarter of 2018 saw 113 deals of at least $50 million, which made up 14 percent of total deal value, while 17 unicorns took in $5.2 billion alone. All stages of the ecosystem, from seed and angel rounds to late stage, saw their median deal sizes grow from the end of 2017. 

Part of this has to do with companies themselves getting older, meaning they are farther along in their lifecycle before they even start raising funding. The median age of a seed/angel company now raising money is three years old, which is double what it was in 2011, and is even higher than the median age of a Series A in 2014. 

"This shift in age isn't so much a trend as it is a change to the traditional investment timeline. Many startups require less capital for operation than before, specifically many software companies that can run cloud servers and hire freelancers until full-time engineers are necessary. This in turn allows businesses to be more developed when first engaging institutional investors, garnering larger deals and valuations," it says in the report. 

All of this is translating into an ecosystem with fewer companies getting larger checks. 

VC fundraising

While the amount of funding going out from VCs is reaching decade-high levels, the amount of funding coming in actually dropped in Q1, with 54 funds that raised $7.9 billion during the first quarter.

The report attributes this to the rise in micro-funds, or funds that are smaller than $50 million which have "niche strategies or regional focuses." These types of funds made up half of the total number of funds closed in the first quarter, though they had been declining in recent years, dropping from a peak of 152 in 2014 to just 104 in 2017, a 31 percent decline.

If the trend this year continues, 2018 will see the first increase in the number of micro-funds in four years.

The increase in micro-funds also caused the median fund size to decline 24 percent, from $50 million in 2017 to $38 million in the first quarter of 2018.

Even though 2018 has started down from the same point in 2017, the report notes numerous funds that should make up the difference, with Khosla Ventures, Sequoia, Lightspeed Venture Partners, and Social Capital all announcing that they are looking to raise funds of at least $1 billion this year.

Exit Activity

In Q1, exits dropped 19 percent year-to-year to 188 deals for the lowest number since the last quarter of 2011. The $8.1 billion in deal value was also the lowest since the first quarter of 2013, when it was just $3 million.

The report puts this on the larger deal sizes, which it says it taking away the incentive for companies to go public. 

"While this is a material drop, it is important to remember that exit timing is largely idiosyncratic and can be delayed for a multitude of reasons. Most recently that reason has been larger VC deals, which supply a long cash runway for VC-backed companies and can decrease the sense of urgency to exit," it says in the report. 

Of those 188 deals, 144 of them were mergers or acquisitions; that's a 19.5 percent drop from the 179 M&A deals in the first quarter of 2017. The largest deal of the quarter was Amazon's acquisition of Ring for $1.2 billion.

The quarter also saw 15 venture-backed IPOs, most notably Dropbox, which debuted in late March and raised $756 million. 

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