by | Jan 21, 2016 | Private Equity

Last Updated: January 21, 2016

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The stock market may be in the midst of a tumble but venture capital is strong. According to Thomson Reuters and the National Venture Capital Association, 46 venture capital funds in the United States raised over $5 billion in the last quarter of 2015. That means that the total venture capital raised for 2015 was $28.2 billion. It was a 9 percent from 2014, but it is considerably higher than the mean for the industry since 2006, which comes in at just $20.32 billion on average.

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“Building on the strong pace set last year, 2015 emerged another strong fundraising year for the industry.  In the last two years alone, close to $60 billion has been raised for deployment to the entrepreneurial ecosystem to help build and grow the next generation of great American companies,” said Bobby Franklin, President and CEO of NVCA.  “Overall, the fundraising environment is quite healthy.  It’s been encouraging to see such a diverse mix of fund sizes in recent quarters, which demonstrates to us that the fundraising environment is becoming a lot more favorable for firms of all shapes and sizes.”

2015 Venture Capital in Detail

Looking at the industry as a whole, the results are even more astounding. According to a MoneyTree Report produced by PricewaterhouseCoopers and the NVCA, venture capitalists invested $58.8 billion in the United States in 2015. “For the fourth quarter of 2015, venture capitalists invested $11.3 billion into 962 deals, down 32 percent in dollars and 16 percent in deals compared with the third quarter when $16.6 billion was invested in 1,149 deals,” writes the NVCA. “The fourth quarter also marks the eighth consecutive quarter of more than $10 billion of venture capital invested in a single quarter, but also represents the smallest amount invested since the third quarter of 2014.”

Tom Ciccolella, US Venture Capital Market Leader at PwC, explained the enthusiasm, saying that it is “the convergence of technology across sectors” that is driving new business models and catching the attention of venture capital investors.

With this in mind, it isn’t surprising that software startups received the most VC funding in the fourth quarter of 2015. According to the MoneyTree Report, there were 369 deals in this space during the last three months of 2015, totaling $4.5 billion in funds. An impressive number, but it is down in the number of deals compared to 2014. However, technology is quite strong in VC compared with other venues. “Undermining the run-up in private investments, public markets remained relatively unreceptive to technology IPOs,” notes the Wall Street Journal. “Technology and Internet companies that went public in the U.S. raised $9.5 billion in 2015, down from $40.8 billion in 2014.”

Biotechnology also made a strong show in the quarter with 95 deals totaling $1.5 billion, up 17 percent from last year, while Media & Entertainment companies came in third with $881 million and 114 deals, which is about the same as it was in 2014.

Established Companies Rule VC

There is also a trend towards more established companies. According to Fortune, “Around 33.6% of the 235 U.S.-based VC funds that raised capital in 2015 were first-time efforts, which is down from 39.1% in 2014.” All in all, venture capital investors are becoming more cautious. “There was a lot of fear of missing out that drove a lot of froth, and now there’s actual fear of losing money,” says Rich Wong, Accel Partners general partner.

The number of dollars companies seeking venture capital for the first time saw was down 12 percent in the fourth quarter of 2015 to $2.2 billion and the number of deals dipped 20 percent to 322. All in all, first time financing made up one out of three deals in the fourth quarter, and 19 percent of all venture capital dollars. That’s not to say that “seed stage” companies are out of luck – there is just a preference for companies that have gone through venture capital financing before, regardless of stage.

However, companies in the early stages are not seeing much growth in the number of venture capital deals made. The most recent MoneyTree report says that investment in companies at that stage of development rose 55 percent in the fourth quarter, to $375 million stretched across 52 deals. Early stage investment declined slightly, but all in al the two development stages accounted for some 57 percent of deals in the fourth quarter  which is about the same as the previous quarter – and the average size of deals went up for both classes. “The average Seed stage deal in the fourth quarter was $7.2 million, up from $4.1 million in the third quarter,” writes the NVCA, while “the average Early stage deal in the fourth quarter was $10 million, up from $9 million in the prior quarter.”

Mergers and the Threat of Acquisition

With venture capital investors pulling back from unestablished companies, startups who need capital going forward may be forced to consider different options, like an acquisition. “The market for mergers and acquisition deals has also pulled back along with the decrease in IPOs. There were 437 M&A deals for U.S. venture-backed companies in 2015 compared with 510 such transactions in 2014,” says the Wall Street Journal. “Likewise, the number of U.S. venture-backed IPOs slid to 66 in 2015 compared with 107 in 2014.” But, there may be a bright side in the middle market.

Citizens Commercial Banking recently polled almost 600 middle-market companies in the United States. They found that roughly 60 percent of the companies surveyed which had annual revenue of $25 million to $2 billion would be open to new deals, and even smaller companies (annual revenue of $5 million to $25 million) and looking to grow through acquisition, with 53 percent being open to talks. Their biggest concerns were inheriting a liability from the acquisition or overpaying for the investment, but the vast majority of respondents are not just looking for bolt-on companies – they are seeking transformation.

To this end, budding technology companies will have a range of new opportunities from an acquisition in 2016, provided they not come to the table with too much debt and can offer real value going forward. Media companies may also see a similar boost if they create ways for established companies to connect better with their target audience as the Internet of Things continues to evolve.

Renee Ann Breiten

Renee Ann Breiten is a freelance finance writer and former management consultant with over 15 years of experience in business management and strategy. She earned an MBA in financial management from Exeter in 2007 and has enjoyed a variety of international business experiences, working primarily in England and Australia. Breiten's work is centered on technology, consumer trends, and investing strategies. Her writing has appeared on TheStreet, Marketwatch, Insider Monkey, Seeking Alpha and Motley Fool.