In 2014, global venture capital (VC) funding came back to levels not seen since 2000, median deal sizes were higher across all development stages and there were more mega-investments of over $50m than at any point since 2000, according to a report by EY.
With the macroeconomic situation improving and an active exit environment in which VC-backed IPOs both increased in number and out-performed other IPOs, the prospects for 2015 look strong.
EY’s global VC leader Bryan Pearce remarked, "VC investors have been putting more capital to work than at any time since 2000 and are benefiting from this with stellar returns when these companies exit via IPO. Confidence is riding high and this is feeding a growing appetite for fundraising and the placing of more, and bigger bets, which is great news for entrepreneurs."
By the end of 2014, global funding, which stood at a total investment of $86.7bn, had surpassed the annual totals for the last 13 years. The strong trend was evident in all three key VC markets – the US, Europe and China.
Compared with 2013, median deal sizes increased significantly, particularly in the US, Europe and China, and there was a marked increase in mega-investments of over $50m.
Three hundred and nine (309) companies received this level of investment in 2014, raising a total of $39.4bn, compared to 141 deals raising $13bn in 2013, reflecting a level of confidence and appetite not seen since 2000.
Pearce added, "The significant increase in deal sizes across the board – and in particular the rise of the mega-investment – shows how effective VCs have been at moving up the entrepreneurial life cycle. VCs are increasingly investing in companies closer to exit, so they are prepared to put more money in.
"This can be a new investment in a fast-growing, high-value, high-potential company, or increasing capital in an existing investment to help it over the line. Angel investors are filling the gap left by VCs in the early stages. Although VCs haven’t and won’t leave this stage completely, the landscape continues to change fundamentally."
Improving macroeconomic conditions have underpinned investor confidence and fueled the development of an active exit and positive fundraising environment.
With a first-day average increase of 25.2%, VC-backed IPOs globally delivered particularly well for investors, with the overall IPO market delivering an average first day increase of 12.9%.
Consumer services companies were recipients of the most investment in 2014, with $29bn invested in 1,690 deals, up 130% by deal value on 2013.
Business and financial services also proved attractive to VC investment, with $20.2bn raised in 1,682 deals.
Pearce added, "Looking ahead to 2015, we expect the upward trend in VC activity to be maintained as the IPO window remains open and the search for returns escalates against a backdrop of relatively low returns from other main asset classes."
From a geographic perspective, given the strength of its economic recovery, VC activity in the US should continue to perform well in 2015.
The outlook for Europe is less certain given the slow Eurozone recovery and uncertainty around monetary policy on the continent.
Despite slower growth in China, which the authorities are combatting with easier monetary policy, the structural rebalancing of the Chinese economy will continue to support VC activity.
According to Pearce, "VC will continue to prefer innovative, well-led businesses with a clear plan to disrupt the market or benefit from the disruption that others have created. 2015 will see larger sums than ever before made available to companies that have a great management team and a really compelling story.
"We’ll also see more VC investment in emerging markets, where the appetite for investing in entrepreneurial companies is growing thanks to an increased appreciation of the value these innovators and disruptors have to an economy."