Number of VC Deals Falls as Investors Chase ‘Unicorns’

Global venture capitalists invested $56.31 billion in 4,894 deals during the first half of 2015–the lowest number of deals recorded by the Pitchbook blog over a six month period in the last 25 years. The major reason for a smaller number of companies being funded is that venture capitalists are throwing huge amounts of money at a small number of “unicorns.”

The major trend in venture capital investment over the last year has been financings for “late-stage” venture capital backed companies, which accounted for a new high of 17 percent of deals completed last quarter, but sucked up over half of all dollars invested.

The ability of high-growth companies to raise mega-large dollars through what venture capitalists now call “private IPOs” has eliminated much of the traditional need to “go public.” As a result of this option, the number of VC-backed tech initial public offerings (IPO) has been declining since the second quarter of 2014. In the second quarter of 2015, only tech 38 IPOs were completed, versus 83 a year ago.

Venture-capital-backed companies traditionally complete between one and four funding rounds, referred to as Series A, B, C and D, before going public. But VCs have been adding a fifth round, called a “D+” series. Over the last six months compared to the same period in 2014, the average size of a D+ series venture deal leaped from $47.8 million to $436.4 million, a spectacular increase in just one year.

As a result, there are now over 100 VC-backed companies that have earned the title of “unicorns” for reaching $1 billion or more in valuation. The Pitchbook blog, which closely follows worldwide venture capital activity, believes unicorns will eventually need to go public to substantiate their valuations. They are looking for Weebly, Remind, Moovit, Deliveroo and Databricks to decide soon to go public.

North America held a 70 percent market share for global venture capital activity by closing 1,609 venture deals with a total of $20.82 billion invested during the second quarter of 2015. But due to spectacularly large unicorn dollar deals closed by Uber, Airbnb and Snapchat, the total number of North American companies that received venture funding fell by 20 percent for the period.

The number of North American VC-backed companies that went public in the quarter fell by 36 percent versus the same quarter last year. But due to the profit from some high-profile VC-backed IPOs over the last three years, 72 American venture capital funds were able to raise $11.7 billion in the second quarter of 2015.

European venture capital activity fell by 30 percent in the first half of 2015, from 512 deals to 362 deals. But total capital invested rose by 47 percent to a record $4.22 billion–roughly 14% of total capital invested globally. About 62 percent of the dollars invested in European VC deals came from U.S.-based VCs.

Pitchbook’s Garrett Black commented that the first half of 2015 saw over $1 trillion in mergers and acquisitions of venture capital back companies. U.S. healthcare deals dominated the sector, with over $300 billion in deals–a 326% increase over the prior year.

Black said the amount of activity could have been ever larger “in the wake of the Supreme Court’s safeguarding of the Affordable Care Act.” He believes that Big Pharma and hospital chains will need to merge in order to cut costs and expand patent portfolios and coverage. Black adds, “Many players have yet to follow suit, which could portend sustained activity in 2H 2015.”