Things are looking pretty good for the venture capital industry. Potential VC investors have a lot of money available, and industry and geographical trends show a positive outlook for VC investing in the near term. There are numerous factors that could negatively affect the outlook for VC investments, but it certainly appears that substantial VC investment activity could occur over the next twelve months.
The most significant positive factor for VC activity in the near term is the supply of available cash. According to a recent report, VC funds currently have approximately $120 billion available for investment. Even though this is a composite number that is applied across the whole VC industry, it is a huge amount of available investment funds.
Another positive factor is the increase in corporate VC investment. In a relatively short time (aided by large amounts of cash on corporate balance sheets), corporate investors have begun to play a key role in the VC industry, especially in larger deals. Last year corporate VC deals comprised 25% of total VC deals, and this percentage will continue to increase. See my prior blog post on the rise of corporate VC investors (Corporate Venture Capital Investments – Good for Startups?).
The shift of a significant portion of VC investment opportunities to other countries should also positively affect VC investment in the near term. As mentioned below, the largest recent VC financing was for a company based in India, and VC investors are seeing substantial investment opportunities in China and many other international markets. VC investment in Asia comprised 38% of total global VC investments last year, up from 11% in 2013.
Technology companies continue to receive the largest portion of VC investments. Recent areas of strong VC investor interest were science and engineering software companies and ecommerce companies. Investments in health care companies appear to have decreased in number, but individual deals appear to be larger than in previous years. Some recent investments show the magnitude of investors’ interest in these key spaces, especially from corporate VC investors. FlipKart, a large Indian ecommerce company, recently received $1.4 billion in VC financing, and Grail, a producer of blood tests for early cancer detection, recently received a VC investment of $900 million. Major investors in these deals were the corporate VC arms of companies including ebay, Amazon, Microsoft and Merck.
An external factor that could significantly favor VC investments is President Trump’s proposed massive infrastructure building and upgrading program. While these types of programs are normally financed by public funds, I believe that we will see a larger component of funding from private investors in this new infrastructure programs. This results from the substantial integration of technology into modern infrastructure projects. Modern dams, roads, power plants, electric grids and other infrastructure projects all contain significant technology components, and most of these technology components will be produced by private sector technology and science companies. Many of these companies will be financed by VC investments, and thus a significant infrastructure building and upgrading program could fuel substantial additional VC investment.
Of course, in today’s scary world there are a number of extraneous factors that could quickly and negatively affect VC investing in spite of all the good things described above. The potential negative factors that keep me up at night are terrorist acts and small- or large- scale military and geopolitical actions. This is further complicated by the rise in VC investment outside of the United States. In some cases, the areas in which VC investments are being made are politically and economically volatile, and the increase in international VC deals will increase the risks associated with such volatility.
Despite the potentially negative factors, the outlook for VC investing over the near term appears to be very positive. I look for current investment trends to intensify, and this, along with the significant amount of available funds, should generate record levels of VC investment. Only time will tell whether and to what extent these investments succeed, but I view this increase in VC investment as a very positive factor for early stage companies in all markets.