Trends shaping the US venture industry in 2019 are starting to solidify now that we’ve closed the books on the year’s third quarter. Investment activity isn’t quite on pace to reach the record deal value posted in 2018, but the environment remains robust. Deal value will almost assuredly top $100 billion for the second year straight, and deal count is likely to exceed 10,000 for the third year straight. The overall climate of the VC ecosystem appears to have cooled slightly, but there remains ample capital in private markets for VCs to invest.
A surge of huge, VC-backed IPOs helped create over $200 billion in exit value for VCs through 3Q, already making 2019 the most lucrative year for exits in over a decade—with one more quarter still to go. Top of mind for the industry, however, is the pricing of these highprofile IPOs and their subsequent performance after listing. These recent listings will likely affect the sentiment around the next wave of companies looking to go public in 4Q and into the upcoming election year. There are certainly other important areas to watch in the current IPO climate as well, as public markets continue to be volatile. Some VC-backed companies have seen their market caps as public companies fall below their last private market valuation, while others have had to deal with corporate governance challenges raised by public market investors. Taking notice are venture-backed companies that are eyeing a public listing and that might find themselves facing a similar financial or governance situation. That being said, public markets still appear to be a viable exit route for high-growth startups— both in tech and life sciences—and there continues to be demand for such companies among public market investors looking for significant growth opportunities, especially for companies featuring sustainable business models and strong unit economics.
VC fundraising efforts in 2019 likely won’t top the record amount of capital raised in 2018, but investors remain flush with dry powder, and capital raised is still on pace to reach the lofty levels of recent years. Many in the industry anticipate an uptick in fundraising activity in the coming months as several VC firms try to close their vehicles before a possible recession hits the economy. Further adding to fundraising optimism are realized returns that will soon be flowing back to LPs from the many massive exits we’ve seen this year. This will enable LPs to allocate capital back into the numerous VC funds seeking it.
On the public policy front, NVCA believes the expanded authority of the Committee on Foreign Investment in the United States (CFIUS) continues to affect VC investment into startups, with delayed financings increasingly becoming an issue for companies. Many VCs are waiting on the final rules of the CFIUS expansion to be implemented in February 2020, which will have a major impact on capital flows from foreign investors into US-based startups.
NVCA also considers US immigration policy a persistent issue, as new efforts by the Trump Administration are making it even harder for talented scientists who study in the US to stay and become entrepreneurs and startup founders in the country. Tariffs and the trade war are having a limited impact on the ecosystem, with some startups affected by increased production costs. The new Opportunity Zone program put into place by the 2017 tax reform law initially showed a great deal of promise but has yet to be fully realized by the startup ecosystem. As the program has been implemented, early signs suggest it has been geared more toward real estate investment into Opportunity Zones than for VCs to invest into startups in these distressed communities. The program is still nascent though, so VCs may still find a way to make it work for investment into startups.
Now that the country is in the thick of election season, policy proposals brought forth by presidential candidates are increasingly being scrutinized for their potential effect on the startup ecosystem. Of particular note are proposals by some Democratic presidential candidates and legislators on taxing unrealized capital gains and on drug pricing, both of which could have unintended consequences for startup investing. With the 2020 election on the horizon, we should expect more proposals that could—intentionally or not—influence the venture landscape.