Software Continues to Dominate VC Investing MoneyTree Reports Largest Ever Quarterly Investment of $1.2B in Q2
Venture capitalists invested $13.0B in 1,114 deals in the second quarter of 2014, according to the MoneyTree Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters. Quarterly venture capital (VC) investment activity rose 34 percent in terms of dollars and 13 percent in the number of deals, compared to the first quarter when $9.7B was invested in 985 deals. The total dollars invested in Q2 2014 marks the largest quarterly investment total since $13.1B was invested in Q1 2001. VC investments for the first half of 2014 reached $22.7B, the highest first half total since 2001.
Dollars invested in the Software industry experienced another significant increase in Q2 2014, reaching $6.1B, which marks only the fourth time since 1995 that investments in Software companies have exceeded $6B in a single quarter. The large quarterly total is due in large part to half of the 10 largest deals of the quarter falling into the Software industry, including a $1.2B deal, the largest single quarterly deal reported by the MoneyTree Report in the history of the report, which began in 1995.
“Investments going into companies with disruptive technologies remained strong in the second quarter, and VC investing is on pace to exceed the $30B invested in 2013,” remarked Mark McCaffrey, global software leader and technology partner at PwC. “When we step back, we not only see technology as a megatrend impacting the way we live, but it’s also disrupting entire industries by bringing the suppliers even closer to consumers. And, as the value of this technology is undeniable, we see VCs as well as non-traditional investors pursuing these deals more aggressively, resulting in higher valuations and larger capital investments. We’re also seeing a shift in the risk profile from the risk of adoption of the technology to the risk in investing in a segment where companies are fiercely battling for market share and the market leader is yet to be determined.”
“Not since the early 2000s have we witnessed this level of quarterly investment activity. Despite being over $15B below the peak, you can’t ignore the historical significance of venture investment during the second quarter,” said Bobby Franklin, President and CEO of NVCA. “Before alarmists declare a repeat of the dot-com bubble, it’s important to keep in mind that a lot of this activity was driven by a handful of eye-popping investment rounds, including a record-setting funding round of $1.2B. Additionally, we hear anecdotally from members about the emergence of new investors in the innovation economy, including the rise of hedge funds, mutual funds and other non-traditional investors making direct investments into presumably pre-IPO companies.”
The Software industry received the highest level of funding of all industries, rising 50 percent from the prior quarter to $6.1B invested during the second quarter of 2014. The Software industry also counted the most deals in Q2 at 454, a 7 percent increase from the prior quarter. Part of the dramatic increase in investing can be attributed to the largest deal of the quarter going to a software company. The $1.2B Expansion stage investment in a transportation software company is the largest deal of the quarter as well as the single largest quarterly investment recorded by the MoneyTree Report since it began reporting on venture capital investing in 1995.
The Biotechnology industry was the second largest sector for dollars invested with $1.8B going into 122 deals, rising 69 percent in dollars and 7 percent in deals from the prior quarter. The increase in dollars invested can be at least partially attributed to two large Later stage funding rounds totaling nearly $320M. The Medical Devices and Equipment industry also experienced an increase in dollars and deals compared to the first quarter, rising 8 percent in dollars and 12 percent in deals in Q2, to $649M in 73 deals.
The Media & Entertainment industry captured the third largest total in Q2 with $1.0B flowing into 124 deals. This represented a 40 percent increase in dollars and a 9 percent increase in deals compared to the prior quarter. The increase in dollars invested can be partially attributed to a large deal, the fifth largest in the quarter.
Nine of the 17 MoneyTree industries experienced decreases in dollars invested in the second quarter, including Business Products and Services (69 percent decrease), Telecommunications (43 percent decrease), and Semiconductors (29 percent decrease).
Venture capitalists invested $2.7B into 270 Internet-specific companies during the second quarter of 2014. This investment level is 18 percent higher in dollars and 20 percent larger in deals than the first quarter of 2014 when $2.3B went into 225 deals. Two of the top eleven deals for the quarter were in the Internet-specific category. ‘Internet-Specific’ is a discrete classification assigned to a company with a business model that is fundamentally dependent on the Internet, regardless of the company’s primary industry category.
Stage Of Development
Seed stage investments rose 46 percent in dollars and 20 percent in deals with $189M invested into 55 deals in the second quarter. Early stage investments rose 17 percent in dollars and 9 percent in deals with $3.8B going into 522 deals. Seed/Early stage deals accounted for 52 percent of total deal volume in Q2, compared to 53 percent in the prior quarter. The average Seed deal in the second quarter was $3.4M, up from $2.8M in the first quarter of 2014. The average Early stage deal was $7.3M in Q2, up from $6.8M in the prior quarter.
Expansion stage dollars rose 53 percent in the second quarter, with $5.7B going into 308 deals. Overall, Expansion stage deals accounted for 28 percent of venture deals in Q2, up slightly from 27 percent in the first quarter of 2014. The average Expansion stage deal was $18.7M, up dramatically from $14.0M in Q1 2014, due in part to the largest deal of the quarter falling into the expansion stage of development.
Investments in Later stage deals increased 25 percent in dollars and 19 percent in deals to $3.2B going into 229 rounds in the second quarter. Later stage deals accounted for 21 percent of total deal volume in Q2, up slightly from 20 percent in the prior quarter when $2.6B went into 193 deals. The average Later stage deal in the second quarter was $14.0M, up from $13.3M in the prior quarter.
First-time financing (companies receiving venture capital for the first time) dollars increased 48 percent to $1.9B in Q2, while the number of companies rose 20 percent from the prior quarter to 351. First-time financings accounted for 14 percent of all dollars in Q2 while first-time deals accounted for 32 percent of all deals in the second quarter.
Of the companies receiving venture capital for the first time in Q2, Software companies captured the largest share and accounted for 40 percent of the dollars and 44 percent of the deals with 155 companies capturing $743M. First-time financings in the Life Sciences sector rose 3 percent in dollars from the prior quarter with $267M going into 32 companies, compared with 38 such companies receiving $261M in Q1. The average first-time deal in the second quarter was $5.3M, a jump from $4.3M in the prior quarter. Seed/Early stage companies received the bulk of first-time investments, capturing 57 percent of the dollars and 75 percent of the deals in the second quarter of 2014.
Information included in this release or related venture capital investment data should be cited in the following way: “The MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters” or “PwC/NVCA MoneyTree Report based on data from Thomson Reuters.” After the first reference, subsequent references may refer to PwC/NVCA MoneyTree Report, PwC/NVCA or MoneyTree Report. Charts and tables displaying the data are sourced to “PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report, Data: Thomson Reuters.” After the first reference, subsequent references may refer to PwC/NVCA MoneyTree Report, PwC/NVCA, MoneyTree Report or MoneyTree.
About the PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report
The MoneyTree Report measures cash-for-equity investments by the professional venture capital community in private emerging companies in the U.S. It is based on data provided by Thomson Reuters. The survey includes the investment activity of professional venture capital firms with or without a U.S. office, SBICs, venture arms of corporations, institutions, investment banks and similar entities whose primary activity is financial investing. Where there are other participants such as angels, corporations, and governments, in a qualified and verified financing round the entire amount of the round is included. Qualifying transactions include cash investments by these entities either directly or by participation in various forms of private placement. All recipient companies are private, and may have been newly-created or spun-out of existing companies.
The survey excludes debt, buyouts, recapitalizations, secondary purchases, IPOs, investments in public companies such as PIPES (private investments in public entities), investments for which the proceeds are primarily intended for acquisition such as roll-ups, change of ownership, and other forms of private equity that do not involve cash such as services-in-kind and venture leasing.
Investee companies must be domiciled in one of the 50 U.S. states or DC even if substantial portions of their activities are outside the United States.
Data is primarily obtained from a quarterly survey of venture capital practitioners conducted by Thomson Reuters. Information is augmented by other research techniques including other public and private sources. All data is subject to verification with the venture capital firms and/or the investee companies. Only professional independent venture capital firms, institutional venture capital groups, and recognized corporate venture capital groups are included in venture capital industry rankings.
About the National Venture Capital Association
Venture capitalists are committed to funding America’s most innovative entrepreneurs, working closely with them to transform breakthrough ideas into emerging growth companies that drive U.S. job creation and economic growth. As the voice of the U.S. venture capital community, the National Venture Capital Association empowers its members and the entrepreneurs they fund by advocating for policies that encourage innovation and reward long-term investment. As the venture community’s preeminent trade association, the NVCA serves as the definitive resource for venture capital data and unites its nearly 400 members through a full range of professional services. For more information, visit www.nvca.org.
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