Venture capital firms invested $9.5 billion in 951 deals in the first quarter, the highest quarterly total since Q2 of 2001, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association, based on data provided by Thomson Reuters. Investment activity rose 12 percent in dollar terms but fell 14 percent in the number of deals, compared to the fourth quarter.
Venture capitalists invested $9.5 billion in 951 deals in the first 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 12 percent in terms of dollars but fell 14 percent in the number of deals, compared to the fourth quarter of 2013 when $8.4 billion was invested in 1,112 deals.
Dollars invested in the Software industry experienced another significant increase in Q1 2014, capturing $4.0 billion and further distancing it by more than three times from the second largest industry, Biotechnology. The last time Software investments reached this level was in Q4 2000. Venture capital investments into Software companies accounted for 42 percent of total dollars and 44 percent of total deals in the first quarter. Five of the top 10 largest deals for the quarter were Software companies.
“Context is everything, and when you consider the context behind the numbers, you start to understand why there was a shift in the first quarter of 2014. Seed and early stage financing numbers are down from the previous quarter, but expansion stage dollars invested are up 34 percent. This was to be expected when you consider the domination by seed and early stage deals in 2012 and 2013,” said Bobby Franklin, President and CEO of NVCA. “Because these companies are now moving to the next stage of their maturing process, the investment rounds tend to be bigger, which explains why the numbers are trending toward the later stages of the investment calendar. To be sure, the spring thaw of the exit markets is providing some firms with new life, but overall capital remains constrained for most venture capital firms.”
“Investments into the Software sector continue to remain healthy as investors look for companies with disruptive technology that challenges the norm,” remarked Mark McCaffrey, global software leader and technology partner at PwC. “These companies are attracting significant funding from venture capitalists and non-traditional investors alike as their business models continue to provide real value across all sectors and get access to global markets. Clearly, the heightened interest is driving healthy valuations which could meet with some volatility. However, barring any significant macroeconomic event, we expect a strong level of investing to continue as these models meet customer needs and deliver value to the stakeholders.”
The Software industry received the highest level of funding of all industries, rising 39 percent from the prior quarter to $4.0 billion invested during the first quarter of 2014. The Software industry also counted the most deals in Q1 at 414, approximately the same level seen in the prior quarter when 409 rounds were completed.
The Biotechnology industry was the second largest sector for dollars invested with $1.1 billion going into 112 deals, falling 23 percent in dollars and 21 percent in deals from the prior quarter. The Medical Devices and Equipment industry also experienced a decline in volume, dropping 37 percent to 61 deals in Q1, while the dollars invested rose 28 percent to $588 million. Overall, investments in Q1 in the Life Sciences sector (Biotechnology and Medical Devices) fell 10 percent in dollars and 28 percent in deals when compared to Q4 2013.
The IT Services industry captured the third largest total in Q1 with $816 million flowing into 59 deals. This represented a 33 percent increase in dollars invested compared to the prior quarter and can be primarily attributed to the largest deal of the quarter, a $325 million investment, going to a company in the IT services industry.
Nine of the 17 MoneyTree industries experienced decreases in dollars invested in the first quarter, including Telecommunications (68 percent decrease), Networking & Equipment (47 percent decrease), and Semiconductors (17 percent decrease).
Venture capitalists invested $2.3 billion into 219 Internet-specific companies during the first quarter of 2014. This investment level is 5 percent lower in dollars and 20 percent lower in deals than the fourth quarter of 2013 when $2.4 billion went into 273 deals. Four of the top ten 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 fell 64 percent in dollars and 41 percent in deals with $125 million invested into 41 deals in the first quarter. Early stage investments fell 3 percent in dollars and 18 percent in deals with $2.9 billion going into 451 deals. Seed/Early stage deals accounted for 52 percent of total deal volume in Q1, compared to 55 percent in the fourth quarter of 2013. The average Seed deal in the first quarter was $3.0 million, down from $5.0 million in the fourth quarter of 2013. The average Early stage deal was $6.4 million in Q1, up from $5.4 million in the prior quarter.
Expansion stage dollars rose 34 percent in the first quarter, with $3.9 billion going into 274 deals. Overall, Expansion stage deals accounted for 29 percent of venture deals in the first quarter, up from 26 percent in the fourth quarter of 2013. The average Expansion stage deal was $14.3 million, up dramatically from $10.3 million in Q4 2013.
Investments in Later stage deals increased 15 percent in dollars but declined 12 percent in deals to $2.5 billion going into 185 rounds in the first quarter. Later stage deals accounted for 19 percent of total deal volume in Q1, identical to the prior quarter when $2.2 billion went into 211 deals. The average Later stage deal in the first quarter was $13.8 million, up from $10.5 million in the prior quarter.
First-time financing (companies receiving venture capital for the first time) dollars decreased 25 percent to $1.2 billion in Q1, while the number of companies fell 24 percent from the prior quarter to 271. First-time financings accounted for 13 percent of all dollars in Q1, which is the lowest percentage total in the history of the survey. Companies receiving VC funding for the first time in Q1 accounted for 28 percent of all deals, which is the lowest percentage total since Q3 2009.
Nearly half of the dollars invested into companies receiving venture capital for the first time in Q1 were in the Software industry, accounting for 48 percent of the dollars and 46 percent of the deals with 126 companies capturing $571 million. First-time financings in the Life Sciences sector fell 38 percent in dollars from the prior quarter to $258 million going into 36 companies. The average first-time deal in the first quarter was $4.4 million, approximately the same as the prior quarter. Seed/Early stage companies received the bulk of first-time investments, capturing 78 percent of the dollars and 82 percent of the deals in the first quarter of 2014.
MoneyTree Report results are available online at www.pwcmoneytree.com and www.nvca.org.