If you’re looking for venture capital (VC) this year to fund your startup, you need to know the direction of the current market: For the past several years, the total dollar amount of VC given to startups has increased significantly, with venture capitalists showing increasing interest in new technologies and potential “unicorns” that could be valued at a billion dollars or more.
What else do the latest statistics indicate about the state of the VC world, and what can you do to make the most of it? Check out these four important statistics:
1. Total VC funding dollars are down 11 percent.
VC rates exploded in the early 2010s. Starting in 2010, that year’s first quarter showed less than $15 billion in funding, with around 2,500 VC deals closed. Then, in the second quarter of 2016, the VC market — at its peak — closed 5,500 deals and funded $45 billion.
Some economists have speculated that this surge represented just the middle step of a larger run of upward momentum. Others called it a sign that the tech industry was in a valuation bubble, and the bubble was about to burst.
Neither view seems to be the case: 2016 was clearly a peak, but one that only slowly has started to calm down. When you compare Q2 2016 (the clear peak) to Q2 of 2017, for example, the total dollar amount of funding given fell 11 percent, to $40 billion. The total number of closed deals similarly fell slowly, from around 3,700 to fewer than 3,000.
Compared to the peak of total closed deals, in Q1 2015, that’s a fall of nearly 43 percent.
2. The median deal size, globally, is now $10.8 million for late-stage VC.
Deal sizes have increased steadily since 2010, when the median sums offered were $0.5 million for angel/seed-funded companies, $2.5 million for early-stage VC rounds and $5.5 million for VC rounds.
Contrast those numbers with 2017, when median figures had increased to $1.0 million for angel/seed-funded companies, $5.0 million for early-stage VC rounds and $10.8 million for large-stage VC rounds. Those numbers represented a doubling or a near-doubling in all three categories.,
When you break down the funding by series, the difference is even more pronounced, with the median Series A funding amount rising from $2.5 million in 2010 to $6.0 billion in 2017; and series D (and later stages) rising from $12.0 million to over $40.0 million, thus more than tripling.
These increases indicated that VC funding is gravitating more toward bigger, more stable, more promising deals and away from smaller, riskier ones.
3. Unicorn valuations are being inflated by 50 percent.
Recent research by the University of British Columbia and Stanford suggests that on average, today’s unicorns (private companies valued at $1 billion or more) are being overvalued by 50 percent. The research looked at current valuations for 135 U.S.-based unicorns, 15 of which, amazingly enough, 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 all this mean for the world of VC and VC hopefuls? It’s further evidence that our startup valuations are unjustly inflated, and that unicorns aren’t really as common as they seem to be.
These valuations also indicate 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 has 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 autonomous vehicle research, facial recognition technology and AI-driven tech for agricultural sustainability.
Obviously, AI has become a hot-ticket investment platform for VCs everywhere, which means that any startup you attempt to create with a machine learning foundation likely has a higher chance of getting funded.
So, what other VC trends are “hot” in 2018? If the current 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 that the market could be considered a “burst bubble)
- growth in the median deal size across all funding rounds
- growth or stability in overvalued unicorns
- even more funding for startups focusing on machine learning and/or AI.
It’s still an exciting time to be a startup tech entrepreneur, all right — though the dynamics are changing. But if VC is the direction in which you’re headed, you should stay up to date with the latest trends, and position yourself accordingly.