The Good …
With over $1.85 billion1 invested in companies in Washington state, 2015 was a fantastic year for venture investing in Washington-based companies. This was an increase of 18% over 2014 and exceeded anything we’ve seen in terms of venture investing in Washington since well before the Great Recession.
Our experience is consistent with the national venture-investing trend, which saw a 24% increase in 2015 over the prior year. While our growth rate was not as large as the growth happening nationally in terms of venture dollars, we saw a positive trend that departed from the national experience in terms of the number of companies getting funded in 2015.
Nationally, the number of companies being funded decreased slightly in 2015, while in Washington, the number of companies being funded increased by 16%. This is important because the number of companies being funded can be a leading indicator of the overall health of a start-up marketplace and so points to the strength of our local entrepreneurial community.
While larger dollars can mean companies don’t need to seek additional venture funding for a longer period of time and so may be better able to execute on their growth strategies, it can also raise valuation expectations and leave little room for error in achieving those growth targets.
The Bad ….
Locally we saw a consistent decrease in the quarter over quarter venture dollars being invested in Washington-based companies throughout 2015. While the number of companies being funded remained strong, the dollars flowing to those companies decreased each quarter in 2015 and so the average amount of venture dollars provided to those companies decreased quarterly.
When we look beneath the averages, we see that Washington had a number of larger fundings in 2015 that significantly impacted our venture investment dollars. The top three fundings from each period decreased quarterly throughout the year and these deals in total accounted for over $850 million, or 45% of the state’s $1.87 billion venture investment in 2015. Said another way, the top 12 deals averaged $70 million per deal while the next 120 deals averaged $8.5 million per deal.
Our experience is not that different from the national trend in terms of venture investors pausing to evaluate if the larger fundings they’ve made over the past couple of years make sense. The number of unicorns, or private companies with valuations over $1 billion, has increased over the past two years and the public market’s ability to absorb the number and size of initial public offerings needed at that size of valuation is higher than we have seen historically. As some of these unicorns have gone public at valuations that were lower than expected, investors have gotten more cautious about making additional, similar investments. Just recently, T. Rowe Price, which had been a consistent investor in certain of these unicorn companies, wrote down a number of those investments based on their belief that the value they saw at the time they made their investments was not there today.
Fortunately for our entrepreneurial community, while we saw some larger fundings in 2014 and 2015, we avoided the unicorn size valuations and so, other than a few Washington companies, the pressure on our venture market isn’t as dramatic as we’re seeing nationally.
The Questions …
We are coming off a very strong year of venture investing in Washington companies, but one that saw the average size of venture investment dollars decrease throughout the year. Given that trend is consistent with what we’re seeing nationally, we don’t expect it to reverse through the first half of 2016. Investors will be more cautious before committing larger venture investment dollars in a given company, and that caution may mean it takes companies pursuing larger deals longer to convince venture investors that the opportunities before them support the larger dollars needed to capitalize on those opportunities.
The consistent number of Washington companies that received funding throughout 2015, and the fact that that number was higher than the average number of companies being funded in Washington over the past five years, points to a continued robust venture community in our region that doesn’t appear to be slowing down in pursuing the opportunities before them. Further, as venture dollars around the country pursued fewer deals, venture dollars in Washington pursued more deals, and bucking the national trend is a positive for our region.
There are a large number of venture firms that raised funds in 2015 to pursue future venture investments. While they don’t need to deploy all of that money over the next 12 months, they will need to deploy it over time if they are going to meet their investors’ expectations. So while we might not see the same number of larger venture investment dollars flowing to Washington companies in 2016, there is no reason to expect that the number of venture investments being made in our region is going to decrease significantly in 2016. While there are no guarantees in terms of future venture investment, all of this points to a continued healthy entrepreneurial community for our region.
1 All venture investment dollars and counts were provided by Dow Jones Venture Source.
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