In the first six months of 2016, venture investing across the US has shifted toward mature companies that are already in a venture firm’s portfolios. Venture capital firms want their strongest portfolio companies to have adequate funding to get across the finish lines of liquidity events. This has resulted in fewer venture deals but larger dollar amounts per deal.
In the Seattle and Washington state region, historically we have not seen this “larger dollars/fewer deals” phenomena but rather have seen a steady stream of companies getting funded. However, in the first six months of 2016, our region has experienced a slowdown in the number of companies being funded, similar to the broader US venture funding activity. While it’s too early to predict whether this is a trend or an anomaly, it’s something our entrepreneurial community will want to keep their eyes on through the rest of 2016.
A glimpse of the past can provide us a view of what to expect. Let’s exclude the past few years (2015 and 2014) that saw a rush of nontraditional investors enter the venture market looking for quick returns and creating the herd of unicorns, and let’s focus on Washington state venture investing in 2013 and 2012, which provides a more comparable picture of where venture investing levels should settle in our Region for 2016.
According to Dow Jones VentureSource, the 127 average number of deals over these two years would otherwise result in 60–65 deals being funded through the first six months of 2016. In contrast, through the first six months of 2016, we saw only 49 deals in our state driving $517 million in investment, which is a bit of a paradox. In terms of the dollars invested, the region is on track to realize a robust year of venture investing — $1.03 billion annualized as compared to the $1.02 billion average in 2012 and 2013.
Unfortunately, as of June 30, 2016, those dollars went into far fewer deals — only 49 of them — and we would otherwise expect that number to be at 63 deals by mid-year (half of the above average of 127). That’s more than 20 percent off the average number of companies typically funded here in Washington.
While it certainly isn’t time to panic, and we’ve had unusual quarters where the number of deals in a particular quarter were down from the quarterly average, if this trend continues, then fewer companies than we would otherwise expect are going to be funded in our Region.
One of the reasons we could see a lower number of companies being funded in 2016 relates to the nontraditional venture investors that participated in venture investing in 2014 and 2015. Their involvement tended to drive up the fair values of investee companies. When these nontraditional venture investors didn’t realize the returns they expected, they curtailed their investing in start-up companies.
Also, the low cost of starting a technology company in terms of software, internet, storage, etc., in Washington is such that these same owners may not need venture investment as early as they once did. Regardless, we are seeing fewer deals getting done through the first half of 2016 than we would otherwise expect.
While the near-term environment shows signs of fewer venture investment deals being completed in Washington-based start-ups, the long-term market for venture investing in our Region remains strong. Venture firms have raised record levels of money that will eventually need to find a company to fund, while interest rates, inflation and unemployment remain low and the overall US economy shows little sign of slowing. So while we may be cautious in the near term, we remain confident over the long term in our Region as a vibrant market for entrepreneurial companies.
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