State Of Early Stage Funding And Technology Commercialization
2017 has come to a close and as we prepare for 2018, we would like to take note of important trends happening in the Venture Capital (VC) industry.
Overall, numbers for the VC industry are healthy with total funding on track for a strong year. Deal $ volume is on track to surpass $100 billion, with a strong showing of funding in later stage and so called Unicorns funding with $1 billion plus valuations.
Global VC Financing Volume and Value in Technology Companies
An interesting finding from the above graph is that the overall number of deals has dropped by one-third since peaking in 2014 while $ values have stayed quite stable.
To dive further into the dramatic fall in deal volume, let’s look at deal volume breakdown by stage of investment:
Global VC Financing Volume into Technology Companies by Stage
Early stage deals have dropped by more than over 50% from its peak in 2014, while both mid and later stage deals have experienced little change. This is puzzling as at first glance the VC industry shows a prosperous year. However, the data is skewed by a few deals that fall under the Unicorn category, while early stage companies are seeing a recession in deal flow. What is also interesting is the fact that $ invested in early stage has stayed quite stable. This means that VCs and angel investors have become more selective in the deals they choose, and that traditional, ultra diversified type of strategies are retracting in favor of greater concentration and high conviction. On average, each deal is getting a lot more capital than in previous years. The graph below provides great insight on US angel and seed activity by deal size.
US Angel & Seed Activity (#) by Size
As expected, the biggest drop occurred in the under $500k category as investors have concentrated their bets on larger deals.
Against this backdrop, Ikove launched in 2014, right at the peak of early stage deal flow. During the past three years, we have seen early stage deal volume drop by half. During the same time, Ikove successfully launched 10 companies with more than $100 million in value, and we're on track to cross $250 million in 2018. We believe the recession in deal flow further widens The Valley of Death and makes it more difficult for ideas to be funded. At the same time, the VC industry continues to move upstream with under 20% of deals at pre-revenue and only 1% at concept level.
The work of the Startup Nursery is more relevant today than ever. The ability to identify, vet and launch disruptive technologies in partnership with research institutions continues to be a remarkable strategy. We knew that marrying strong research, disruptive intellectual property, world class teams and smart capital from strategic partners and family offices from Ikove’s vetting and due diligence would generate solid winners.
Our thesis just received strong validation via a breakthrough academic paper by Schnitzer and Watzinger at the Ludwig-Maximilians-University Munich, which measures the impact of “knowledge spillovers from venture capital-financed companies into the activities of other companies.” Their findings suggest that on average “the spillovers are NINE times larger than those generated by R&D investments of established companies,” and startups with experienced inventors holding a patent at the time of receiving the first round of investment produce the largest spillovers, indicating that venture capital fosters the commercialization of technologies."
These findings reinforce what we are seeing in our day-to-day work. It shows the rise of corporate VCs as it makes more sense for large companies to invest in outside technologies to bring in-house, and it also indicates how the technology spillover at early stages is quite significant. This 9X results crushes any industry level returns from angel investors through later stages, and is similar to the numbers we are experiencing so far with our Nursery.
We will continue to monitor the deal flow situation closely and we believe the trend is here to stay. This implosion in early stage financing provides a strong foundation for Ikove’s continued performance as our strategy is completely independent of VC funding and furthers the need for the Nursery as a bridge from lab to market.
First Annual Ikove Startup Nursey Innovation Showcase
On February 1st, we are excited to host our first Ikove Startup Nursery Innovation Showcase in New York City. Details can be found by clicking below.
We would love for you to attend and spend time with our team.