2018 VC & University Startup Financing Trends

We’re almost halfway through 2018, which means we at Osage University Partners (OUP) again hosted our annual financing trends webinar (last year’s recap). For the 2018 version, our investment team analyzed not only general VC investment trends, but also trends specific to our partner university network of 5,000+ startups.

I should mention this blog post only pulls a few highlights out of the webinar. For a more thorough analysis of the current state of startup funding, I encourage you to watch or listen to the full webinar.

So which sectors have had the greatest investment and which are facing funding challenges? How do these trends apply to advancing academic technologies? What does the beginning of 2018 imply for the rest of the year and what lies over the horizon?

VC Activity Overall

Source: Pitchbook NVCA 2017 report
  • In 2017, VCs invested the most capital since the dot-com era: $84B. That is a 16% increase over the prior year. At the same time, there has been a decrease in the overall number of deals since 2015, and a consolidation of VC dollars towards a few perceived winners.

VC First Financings

Source: Pitchbook NVCA 2017 report
  • The number of first financings has been steadily declining since 2014.
  • The median age of companies raising angel & seed rounds has risen from 1.6 years to 2.4 years — a 34% jump since 2013.

Software

Source: 2017 NVCA/PB Report
  • Software has taken a slow downturn in both share of total US VC funding in dollars and deal count, down from 47% in 2016 to 36.5% in 2017. This slight funding dip has mostly impacted early stage financings, where deal volume is nearly half its peak in 2014.
  • That said, all stages of software deal activity have been shrinking since 2014, not just early stage financings. This is partly a result of VCs becoming more disciplined on funding, and substantial dollars going into a few select players via megafunds and ICOs.
  • Emerging areas: AI Optimized Computing, AI Applications, Next Generation Encryptions, Serverless and Function as a Service, Bioinformatics, Enterprise Blockchain.
  • Less Active: Apps, SaaS, and Fintech.

Early Stage Software

  • In the past, software seed financings were characteristically $500K and Series A rounds ranged from $2–10M. In recent years we have seen a shift to larger seed investments that resemble a Series A round, and a new financing class has emerged called the ‘pre-seed,’ filling the seed round void.
  • There has been a dramatic decrease in (what we are referring to as) ‘Pre-Seed’ financings since 2015, with angels having exited and traditional seed investors moving on to larger financings.
  • Investors focusing on ‘pre-seed’ rounds are often accelerators, some of which are tied to strategic and corporate venture capital, and others to university ecosystems.

Physical Sciences[1]

Source: OUP Database, Datafox, Pitchbook. Data includes OUP partner institution startups only.
  • Investment in hardware has been growing as VC attention returns to general core technologies, although cleantech and materials investing continues to be small (and volatile).
  • There has been an uptick of VC investment in hardware over the past several years, with a very rough approximation evidencing that university startups are responsible for almost 10% of hardware venture activity. This strong growth has been fueled by a few consumer plays and huge growth in the semiconductor space.
  • Still, 3x more dollars are being invested in software than hardware.
  • Emerging areas: Autonomous Driving, AI Chips, Quantum Computing, Robotics, Industrial IoT.
Source: Datafox, Pitchbook

Deep Dive: Chips for AI and the Edge

  • Leaders like Google and Apple are building their own datacenter/edge chips for AI algorithms and demonstrating the use case for ASICs in servers.
  • Power consumption and on-device capability drive interest for dedicated edge processors that can deploy neural networks efficiently on small devices.
  • Some large mega-deals are providing companies with significant runway, but outside of mobile, there is uncertainty where large quantities and large-revenue designs wins will come from.

University Tech Startup Activity

  • University startup financing trends are well aligned with overall startup financing trends. While the amount of capital raised by OUP partner university startups[2] has been steadily increasing each year, the number of deals funded has been decreasingover the past 5 quarters.
  • Tech startup HQs have been gradually expanding to entrepreneurial hubs outside of California showing more geo-diversity.

Therapeutics Trends

  • More than 60 therapeutics-focused venture funds are investing in the early pre-clinical stage (see chart above).
  • In 2017, more than $1B was raised by first-time venture funds investing in therapeutics at the company formation and early preclinical stage, implying that there is a healthy appetite amongst Limited Partners (LPs) to fund the creation of new venture capital funds with this strategy. Some of these funds are Bioinnovation Capital, Kairos Ventures, Pivotal Bioventure Partners, Quark Ventures, Arix Bioscience, Vide Ventures, and Samsara BioCapital.
Source: OUP Internal Data, Datafox. *Does not include IPOs or post IPO transactions. ^Likely below actual as some 1Q2018 financings have not yet been publicly reported.
  • In 2017, there were 167 private biotech financings in start-ups from OUP partner institutions, raising ~$3.5B
  • Since 2015, the ratio of the capital raised to number of deals among OUP partner institution startups continues to reflect the trend towards large mega-round financings in biotech. In 2015, our partner institution biotech startups raised $3.6B across 184 deals, $3.3B across 191 deals in 2016, and $3.5B across 167 deals in 2017.
  • For financings larger than $1M, the median round size was $14M.
  • Emerging (and Continuing) Trends: Immuno-oncology, Oncology, Immunology / autoimmune / NASH, CNS, Novel Targets & Platforms, Orphan / Rare Diseases, Gene Therapy.

Medical Device Trends

Source: SVB 2018 Healthcare Report
  • The number of medical device deals remained steady in 2017, however the total capital invested in the medical device sector increased by almost 40%. This was primarily driven by an increase in Series A funding and increased investment interest from corporate VCs.
  • In the device sector overall, cardiovascular devices captured the most investment dollars ($451M), followed by Neuro ($276M), and Ear, Nose and Throat ($235M).
  • IPO & M&A volume matched that of 2016 but is still down from the peak seen in 2015.
  • In 2016, family offices and PE funds showed increased activity in medical device investing. That interest continued into 2017, but the sector also saw signs of renewed interest from traditional VCs such as HealthQuest, Novo, and OrbiMed.

Diagnostics Trends

Source: SVB 2018 Healthcare Report
  • Diagnostics & tools fundraising increased 40% in 2017, reaching $2.8B. This was in part driven by mega-investments in Guardant Health and Grail ($1.6B in total).
  • The number of Series A investments increased by 30% from 2016–17, though the total Series A investment dollars in 2017 remained relatively flat in comparison to 2016.
  • The exit landscape has been bleak, with only one diagnostic IPO in 2017, and not a single acquisition.
  • Exits in diagnostics & tools have been archetypally dominated by players such as Roche and Illumina, though there is an expectation that new tech acquirers will be invading the healthcare space such as Amazon, Apple, and Alphabet.
  • Speaking of invading tech investors, since 2015 traditionally tech-focused VCs have emerged as active investors in the diagnostics & tools sector. The new investors include well-known tech VCs such as Data Collective, Khosla, and Sequoia.

It’s unclear whether 2018 will surpass 2017’s record high $84.2B VC investment, nor whether VC dollars will continue to consolidate towards perceived winners thus shrinking the number of startups getting funded. We’ll be back at the end of the year with an update on university startup financing trends. In the meantime, check out our webinar archive on various industry sector startup and financing trends.


Notes

[1]Partner university’ refers to the 97 institutional technology transfer offices (TTOs) OUP has a relationship with.

[2] We interpret physical sciences as hardware, materials, and cleantech.