Activity Overview — Broad Economy
Through the first nine months of 2016, the value of total venture capital investments across all industries totaled $38.1 billion, a -20% decrease over the same period in 2015. In terms of YTD investment through the first three quarters of 2016, the software industry received $17.5 billion, an -8.4% decrease in dollars invested over the same period in 2015. The software industry represented 46% of all venture capital dollars through the first three quarters of 2016. Biotechnology, which accounted for 14% of venture capital dollars YTD through Q3 2016, received $5.3 billion, a -12.5% decrease in dollars invested when compared to the same period in 2015.
The software industry continued to have the highest level of quarterly funding, receiving a total of $3.7 billion in Q3 2016, a -39% decrease from Q3 2015. The software industry has remained the sector with the most dollars invested for 28 straight quarters. The biotechnology industry, the second largest industry by dollars invested in Q3 2016, received $1.8 billion, a decrease of -15% from Q3 2015.
Venture capital investment represents an alternative asset class that is not correlated to market returns, and as such, the total number of investments made is not the best proxy to monitor changes in investor sentiment. Changes in investment dollars, however, provide a clearer picture as to directional trends. In relation to the same period in 2015, the first nine months of 2016 saw venture capital dollars in later stage companies decrease -29%, followed by the early stage and expansion stage, with a -22% and -17% decrease, respectively. However, seed stage investments showed a large increase of +109%. Three $1 billion+ later stage deals in Q3 (Deliveroo, $1B; Hike, $1.4B; Airbnb, $4.5B) drove the average median pre-money valuation for Series D+ deals to $718 million, a level not seen since early 2009.
Medical Devices & Equipment Segment
Venture capital investment in medical device and equipment represented 4% of total venture investment in the first nine months of 2016, a decrease from the 5% proportion of investment in the first nine months of 2015. The amount invested in Q3 2016 was $663 million, +19% higher than Q2 2016.
Outlook
After seeing a decline in venture investing this quarter, venture capital investment activity is expected to rebound in Q4 2016, assuming 2016 follows the strong final quarter performance in each of the previous three years. Investor sentiment experienced a shift back towards mature, later stage companies, evidenced by the 52% increase in Series D+ dollars invested. This occurred while all other stages of development experienced a decrease in dollars invested. This is being driven by mature companies turning to venture capital investors for funding rather than utilizing the IPO market.
