By all measures, much of 2014 and 2015 were strong years in venture capital funding. The current forecast is, however, less optimistic for founders looking for venture backing; the end of 2015 saw a pullback in private investing and trends for the start of 2016 demonstrate caution among investors.
2014 and 2015 in Review
The Fundraising Report released by Thomson Reuters and the National Venture Capital Association (NVCA) in January revealed that U.S. venture firms committed $28.2 billion over 2015 and $31.1 billion in 2014, making the past two years the strongest since the economic downturn began in 2008.
According to the NVCA report, the decline for 2015 is attributable in large part to the uptick in caution and dip in new private investment in Q4. Valuations soared through much of 2015, with 60 unicorns – those tech startups reaching valuation of $1 billion or more – established worldwide in the first three quarters, and median U.S. startup valuations ranging between $50 and $70 million during the same period. Moving into Q4, investors pulled back significantly with only 12 new unicorn valuations worldwide and U.S. startup valuations dropping to a median of $27.5 billion – a 60% decrease from Q3.
A combination of factors appears to be contributing to fatigue in the private investment market, including general economic slowdown in China and uncertainty in the region; longer average time to initial public offerings (IPOs) for startups and, increasingly, technology IPOs falling short of their private valuations; and growing likelihood of U.S. interest rates rising, which would offer institutional investors potential for stable returns without the risks associated with investing in new technology.
New technology continues to dominate the available venture capital landscape and within the U.S., California, New York and Massachusetts remain the leading markets for venture capital investing.
Strategies for Startups
The Wall Street Journal recently highlighted sound advice for surviving in the increasingly cautious venture capital marketplace. Founders should consider focusing on the following:
Competition in fundraising has always been part of the challenge for early stage companies. When facing a more challenging financing environment, it becomes even more important for emerging companies to focus on their bottom line and find ways to set their company apart in the eyes of investors.