Macroscope | Venture capital sector heading back to earth
First financing and exits both down
The venture capital sector is heading back to earth. The big question for the new year is how bumpy its landing might be.
A new set of data indicates that key segments in venture capital – the business of funding start-up companies – will be down sharply for 2015, a sign that the dramatic run-up in start-up valuations is peaking and the funding of new ones is tapering off.
“There are a lot of indicators that we’ve reached the peak of the VC investment cycle,” said Daniel Cook, an analyst at New York research firm PitchBook Data.
The number of “first financings”, the very first round of professional funding for nascent start-ups beyond money from family or friends, stood at only 1,983 financing deals as of December 1, compared with 3,368 for all of 2014, according to PitchBook. The total dollar amount for first financings figures to be flat or down: US$6.91 billion recorded through December 1 compared with US$7.5 billion in 2014.
Meanwhile, money reaped through so-called exits – via the sale of start-ups to another company or through an initial public offering of stock – is projected at about US$64 billion on 860 deals in 2015, compared with US$93.77 billion on 994 deals in 2014, according to a Pitchbook analysis.
The drop in first financing “indicates that the future crop of VC-backed companies will be weaker than we’re used to seeing”, Cook said. Plus, he said, “Exits are down dramatically, and the public markets are in limbo.”