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After the largest year on record for venture investment in 2018, it was safe to wonder if 2019 would start off slower than the heady levels reached last year. Any thoughts of a venture slowdown were quickly dashed by the first quarter of the new year, as 2019 picked up right where 2018 left off with $32.6 billion of capital investment recorded in 1Q. The trend that has emerged in the venture industry over the last few years of fewer, larger venture deals continued unabated in 1Q and in fact accelerated, with deal numbers continuing to shrink even as investment levels maintained their 2018 pace. While the recent trend of high levels of investment slowed slightly in the life sciences sector, investment is still robust, and the successful IPO market for VC-backed life sciences companies over the last few quarters continues to give positive momentum to the sector. Finally, this edition of the Venture Monitor features a new dataset exploring investment in female-founded companies, which accounted for 2.2% of total VC deal value and 5.5% of total VC deal count in 1Q 2019. 

Once upon a time, a $100 million investment round was a rarity. Now $100 million rounds have become almost a daily occurrence, a trend that continued in the first quarter of 2019. While certain companies are able to attract even larger investment rounds faster than ever before, the continued reduction in deal count does invite the worry among some investors of “haves and have nots” in the startup ecosystem. That said, for entrepreneurs who can secure these deals, capital has perhaps never before been so readily accessible. While this is great for entrepreneurs, it also puts pressure on venture investors around proper due diligence and poses the question of whether it is more important to invest speedily to access competitive rounds, or complete thorough analysis before investing. 

This high level of investment and increasing valuations over the past several years have resulted in companies continuing to stay private longer. As a result, more LP capital in venture funds is locked up in unrealized gains which has led to overallocation issues for some LPs. Despite this trend, annual fundraising hit an all-time high in 2018 as distributions have been strong and as net cash flows from VC funds to LPs have been positive each year since 2012. Furthermore, the slew of VC-backed IPOs coming up in 2019 will likely create significant liquidity for LPs, allowing them to reinvest in venture funds to then support the next wave of startups. 

With the conclusion of the government shutdown and with public markets stabilizing after a rocky end to 2018, a torrent of anticipated VC-backed IPOs kicked off in the first quarter, with Lyft’s $24.0 billion IPO leading the way. Many more VC-backed unicorns are expected to go public soon, including Uber, Slack, Airbnb, Pinterest and Postmates. In fact, 20 VC-backed companies are currently in IPO registration. The next six months of VC-backed IPO activity has the potential to be very strong, funneling billions back to venture firms and their LPs, which will likely refuel the industry with capital commitments for years to come. One other impact of all these IPOs is a potential exodus of talent that eventually leaves to start new companies. The myriad startups founded by the “PayPal mafia” are an example of this trend. And a recent survey from First Round Capital reported that when asked which US-based company will spin out the next generation of notable founders, the highest percentage of respondents named Uber. 

Another point of interest as 2019 starts is what new, dynamic sectors are capturing venture investors’ attention. As huge flows of capital pour into the core software and SaaS companies, many VCs are looking to emerging sectors that are less congested with investments. Some areas to watch include cybersecurity, robotics, the applications of artificial intelligence & machine learning (AI & ML), next-generation infrastructure, fintech, healthtech and traditional industries ripe for disruption. In the life sciences sector, cancer treatments, gene therapy and rare diseases continue to garner interest, while there has been some resurgence in neuroscience and medtech. The intersection of digital and biology could also be an area that sees attention in 2019. 

The impact of two major policy issues on the venture industry will also be critical to how 2019 shapes up: foreign investment (i.e. the Foreign Investment Risk Review Modernization Act, also known as FIRRMA) and immigration. FIRRMA and the foreign investment regulations that have come out of it are already introducing friction into both the GP-LP relationship and the way US VCs and startups interact with foreign co-investors, according to NVCA. So far, the new regulations and restrictions seem to be workable for the industry, but as more regulations are introduced, they could push away more foreign co-investors, which would substantially reduce the capital available to US startups. As NVCA has stated before and maintains, the immigration policy of the Trump administration will likely continue to negatively affect new company formation in the US, as many of the best and brightest entrepreneurs from around the world face barriers here and increasingly have options to start their companies in countries with more welcoming policies. VC is a global business, and public policies that position the US as the best place for an entrepreneur to start and grow their company are critical for the health of the ecosystem.

Read the entire Pitchbook Venture Monitor report for 1Q 2019 here.