2019 finishes as second strongest VC investment year on record

Despite a decline in venture capital investment dollars last year, 2019 closes out a record-breaking decade for entrepreneurs seeking VC.

As the 2010s came to a close, we can say with confidence that we experienced the greatest 10-year run in history for entrepreneurs raising venture capital. Between 2010 and the end of 2019, venture-backed startups raised more than $730 billion, almost doubling the $400 billion raised in the prior decade. What can the trends of the last year – and the last decade – tell us about what’s to come?

Let’s look at what drove the massive growth spurt in funding over the past decade:

1. An explosion in IT; software “eating the world”
2. The availability of mobile computing bringing goods and services to consumers anytime, anywhere
3. The technology enablement of industries — business and financial services boomed with the rise of FinTech
4. Continued advances in health care, health services and biopharmaceuticals

The environment was also shaped by a prolonged zero interest rate environment that saw investors seeking yield and turning to venture to get it. In an era of abundant private capital, companies raised significant amounts and poured that into topline growth, in some cases not building infrastructure or positive unit economics. This is now being viewed with more scrutiny, especially in the consumer-facing markets.

2019 VC investment tops $100 billion for second year in a row

Venture-backed startups once again raised a staggering amount of investment, bringing in $114 billion in 2019. This is down from the record-breaking $140 billion brought in 2018, nevertheless, it marks only the second time in history that over $100 billion was raised by venture-backed companies. With $25 billion raised, the final quarter of 2019 was the lowest performing quarter in the past two years. The decline can be attributed to funding companies that believe they can spend their way to market leadership and profitability, especially in the consumer segments. Q4 performance also reflects a larger slowdown in VC investment. We have been in a prolonged bull run for venture capital funding, but all bull runs come to an end at some point.

Later stage rounds accounted for just 12% of the deal volume in Q4 but comprised 46% of all dollars raised. This is driven in part by a renewed concern of a “winter freeze” coming to the venture market and not wanting to get caught without enough capital. It is also consistent with a trend we have seen the past several years where easy access to private capital has led many companies to raise large amounts of private capital rather than explore the public markets.

The most active sectors in terms of number of deals and the amount of capital raised throughout Q4 were information technology and business and financial services, which accounted for 56% of all capital raised this past quarter. Information technology saw 402 deals and raised $6.6 billion, while business and financial services saw 302 deals, raising $7.2 billion in funds. It’s very likely these two leading sectors will continue to dominate the industry as software continues eating the world and further technology enablement of industries brings new solutions to the financial services world.

Slowdown of mega-round financings

This past year had the highest number of mega-round financing deals since we started tracking them. But in the final quarter of 2019 we saw a significant reduction in the number (34%) and dollar value (29%) of the deals. The decrease in mega-round financings could reflect a more disciplined view from investors of how to deploy capital at the later stages. 

New regions emerge, see double-digit QOQ growth

Corresponding with past trends, Silicon Valley, New York and Boston continued to dominate venture capital investments in the US with a combined 60% of the capital raised in Q4, raising $8.9 billion, $3.6 billion and $2.2 billion, respectively. As venture activity continues to moderate, I expect this concentration to continue to rise.

Despite an overall slowdown in Q4, emerging regions like Los Angeles, Seattle, San Diego, and Orange County bucked the trend with increased investment across the board. Combined, they raised over $3.8 billion in funds during the final quarter and Seattle (18%), San Diego (29%), and Orange County (24%) saw double-digit growth. The leading sectors responsible for this increase were consistent with national results, including information technology, business and financial services, and health care.

Public unicorns may dominate in the near future

As the days of unlimited private growth are ending, it’s very likely that private companies won’t be raising as much capital as they have in the recent past, opting instead to go public earlier. I predict that the public unicorn population will continue to grow and even outpace the creation of private ones. But, this transition will take time as we have an entire class of companies that grew up in an environment of seemingly unlimited capital availability. Companies will also continue to raise money as a defense mechanism and utilize the significant amount of capital they have raised over the years.

Looking ahead at 2020 and beyond

As we kick off the new year and decade, I expect to see a slowdown in growth in the venture capital industry. The strong momentum we’ve seen in the past two years will likely continue into 2020, but it will eventually become difficult to keep outperforming strong years. I predict we will see less than $100 billion raised in venture capital in 2020 – and this is a good thing.

In addition, the uncertainty around the ongoing trade war, which has had an impact on frontier technology, could possibly continue. I believe companies with consumer exposure should insure they have ample capital to take financing risk off the table as we continue to learn to deal with economic uncertainty and volatility.

Long-term, I am very bullish on the overall asset class and the opportunities technology has to impact countries, companies and individuals. It’s a question of timing. In my experience, it always takes more time and money than expected. After all, I’ve never met an entrepreneur who said they achieved their goal faster than they anticipated and it cost less than they thought it would.