It seems the overall sentiment is changing. In the past few days, I have read numerous headlines and wary blogs: Fear and Sadness in Silicon Valley, Somewhere Over the Brainbow: The Unicorn Window is Closing. What is going on to punctuate the perceived somber attitude of investors in early stage companies? Rather than react with more emotionally driven fear and gloom, let’s take a look at some data and facts.
Here are some of the trends that are being reported:
# Valuations are up for companies receiving angel capital. Matter of fact valuations are up 30% over last year according to the Angel Capital Associations latest report.
# Venture Capital activity is down. It is down significantly. In third quarter activity had dropped 22% from same quarter last year whereas, year over year, venture capital activity is down 34%.
# Private equity deal count is the lowest in 2 years.
Closer to home, The Atlanta Technology Angels, a network that usually represents overall national trends in angel activity, is recognizing a level of deal activity comparable to 2014’s banner performance. The same number of opportunities are in due diligence, the deal flow quality is trending up and the number of bigger deals closing is climbing. On the other hand, the actual number of opportunities that have closed YTD is slightly down over 2014 highs.
So is the environment really changing?
The number of VC megarounds (greater than $40M in US companies) continues to climb and has surpassed last year’s record performance. There were 40 megarounds inked in July alone. In 2015 year to date, every month save one has demonstrated more megarounds than 2014. This year is marked by large infusions of capital flowing to less early stage ventures. Considering the actual trends in mega deals at the VC level and the increasing size of deals at the angel level, it appears that the real trend is higher amounts of capital being raised in a single round at both the VC and angel level.
That being said, valuations are still very high. As exhilarating as it is for entrepreneurs to receive higher valuations, investor’s sentiment may be driven lower. No investor wants to over pay to get into a deal. Most recognize that the single largest factor in successful financial outcomes is the price in which investors enter a deal. Valuations can both lure and deter investors so entrepreneurs should stay informed of the trends.
Higher valuations could be driving investors to become more selective resulting in less overall deals. Because the capital managed through funds still needs to be deployed, it may result in more capital being deployed in fewer deals. Let’s see what Q4 brings. As funds deploy the last wave of capital in 2015 and valuations remain high, it is sure to be a turbulent time.