Insights From The U.S. Venture Capital Fundraising Market In 2015
At Sapphire Ventures, we make a habit of analyzing the U.S. venture capital fundraising market to inform our investment perspective as a limited partner (LP) in early-stage VC funds. Some of this review informs our prediction pieces, such as my colleague Elizabeth“Beezer”Clarkson recent article Reading The Venture Tea Leaves For 2016.
Looking back at 2015, data provided by the National Venture Capital Association (NVCA) and Thomson Reuters offers some interesting insights, including the clear slowdown in fundraising over the last few quarters, the relatively low amount of commitments to first-time funds and the rather large amount of commitments to relatively few managers. Following are a few tidbits from our review of the data.
1. Commitments to venture capital were down quite significantly in the second half of 2015.
In 2015, LPs committed nearly $27 billion to 234 funds. Towards the end of the year, the pace of funds holding closes slowed both in terms of dollars raised and number of funds raised. This drop in commitments could indicate a shift in LP sentiment in the market as macro pressures continue to loom, or it could just be a matter of timing of fund cycles. In general, it seems like most LPs are fine waiting on the sidelines to see how the macro plays out for at least one quarter before committing to new funds in 2016.
2. Both first-time and follow-on funds were affected by this slowdown of commitments.
Moreover, the slowdown in number of funds closing is clear for both first-time and follow-on funds. There were 49 first-time funds that closed in the first half of 2015, but this number dropped to 33 first-time funds closing during the second half of the year. The number of follow-on funds also decreased from 86 in the first half of the year to 66 in the second half.
Further, the absolute number of dollars committed to first-time and follow-on funds dropped rather significantly, as seen in the chart below. Average fund size also dropped towards the end of the year, particularly in follow-on funds, which had average fund size drop from $179 million to $124 million from the first to second half of the year.
3. While 82 first-time funds were able to raise capital, the total amount of dollars committed to these new funds was relatively small.
The 82 first-time funds that were raised accounted for approximately 35 percent of all funds that closed in the year by number; although they comprised only 12 percent of the total dollar commitments by LPs. On the other hand, there were 152 follow-on funds that closed, equaling 65 percent of the total number of funds and comprising 88 percent of the total dollar commitment.
4. While follow-on funds are on average much larger than first-time funds, several attributes seem to increase the likelihood of closing on a larger first-time fund.
Typically, large first-time funds that closed during the year (left side of chart below) fell into one of three buckets: (i) the general partner (GP) previously held a senior management role at a large technology company such as Google, Facebook or Twitter; (ii) the GP was part of a partnership with another established financial institution that helped raise the fund; or (iii) the strategy required a larger fund size to execute (i.e. primarily later-stage investment focus).
5. Capital is concentrated in top funds, with four funds — including NEA, Tiger, Bessemer and IVP — raising funds greater than $1 billion of assets under management.
These four funds alone comprise 31 percent of total venture commitments in 2015. The other 25 funds with commitments greater than $250 million basically closed on as much as the top four funds combined. Of all of the funds raised, the top 50 funds comprise over 80 percent of the capital commitments.
6. The velocity of small funds is much greater than larger funds, although the power to scale companies through significant follow-on investments still seems to be concentrated in a relatively few number of managers.
Double clicking on smaller funds, those with less than $100 million in assets under management accounted for almost 75 percent of all funds closed in the year by the total number of funds. The graph below shows that the bulk of capital commitments are in funds greater than $250 million (66 percent of total capital closed on for the year), which vastly trumps the amount raised in funds less than $100 million (only 15 percent of total capital commitments). So it seems that larger funds still have decision-making power in terms of which opportunities get capital to scale at expansion and later stages, even though there is still plenty of capital to fund early-stage, capital-efficient businesses.
As well, the graph below highlights that there are relatively few funds in the “Series A” fund size, defined heuristically in this case as funds between $100 million to $250 million. The large number of small funds combined with the modest number of funds which closed on potential follow-on capital could mean that many businesses will continue to get funding at the early stage but may find it more challenging to raise a Series A or Series B over the next year or two as there are fewer firms making these follow-on financing decisions.
7. Despite the high absolute number of micro-funds, many are still relatively small in terms of assets under management.
Among funds that closed less than $100 million, there is a story of the “haves” and “have nots”. Within this category, the average fund size was close to $26 million, while the median fund size was roughly $15 million. Additionally, most funds are on the smaller end of the spectrum with a large number (77) under $10 million in capital commitments. It also seems that when funds approach the $100 million mark, they generate momentum, bypassing a fund size of $80 million to $90 million in commitments, and jump to $100 million or more.
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