These are the industries, business models, and cities attracting the most venture capital (so you can optimize your startup fundraising strategy)

 By Martin Luenendonk| 2017-07-24T22:39:03+00:00 May 24th, 2017|

Some of today’s most successful companies like Uber, Facebook, and Airbnb have been backed by numerous venture capital investors.

You may be on the verge of starting your own company. Maybe you’re at a later stage and you are thinking of raising external funding to take your business to the next level.

You have already done your research and understand what venture capital funding entails. You have also done further research on how to create an impressive startup pitch deck for potential investors.

But you still don’t fully understand the investment patterns of VCs. Where does their money flow? In what ind­ustries do they mainly invest? At what business stages? In which geographical regions are VC investments heavy? Does their investment behavior evolve over time?

Startups need venture capital to grow their business but venture capital investors tend to invest in specific types of startups.

Learn about whether your startup has high chances of raising money based on VC activity in relation to industry, geographical region, business stage, and business model.

The global VC market size for the full year 2015 was $128.5 billion.

Venture Capital 2015

Source: Dart Consulting Global Venture Capital Investments Touching New Heights in 2015 with $128.5 B Worth VC Backed-up Ventures – Trends and Major Industry Ventures. May 2016.

Let’s explore which industries got the biggest slice of the pie.

These Industries Receive the most Venture Capital Funding

A 2016 report from the Martin Prosperity Institute found that VC investments are heavily concentrated across a number of industrial sectors.

In the United States, the first five industries account for 76 percent of all VC investments, which translates to about $25 billion.

VC industries

According to the National Venture Capital Association, the top ranking industries in the United States are:

  • Software industry, which accounts for 36.2 percent of all VC funding, translating to roughly $12 billion.
  • The biotechnology industry ranked second with 17.3 percent of all VC investments, which is roughly $5.7 billion.
  • Media & Entertainment ranked third with 9.5 percent, which translates roughly to $3.2 billion.

Due to what is being termed the fourth industrial revolution, software continued to receive the highest VC funding in the fourth quarter of 2015. In the fourth quarter 2015, the software industry received $4.5 billion in 369 deals despite going down 24 percent in dollars and 17 percent in comparison with the third quarter. In the full year 2015, however, software went up 8 percent in dollars and down 5 percent in deals, compared with the full year 2014.

In the fourth quarter of 2015, the biotechnology industry received the second largest amount of VC funding, collecting $1.5 billion in 95 deals. This was a 32 percent drop in dollars invested and a 25 percent decrease in deals in the third quarter. In the full year 2015, however, biotechnology went up 17 percent in dollars and remained consistent in deals in comparison with 2014. Note, however, despite ranking second, biotechnology did not make the top ten deals.

The media & entertainment industry secured $881 million in 114 deals in the fourth quarter of 2015. The industry saw a 40 percent dollar decrease in comparison to the third quarter despitegoing up 14 percent in deals. For full year 2015, media & entertainment remained constant in dollars invested and went down 13 percent in deals in comparison to the full year 2014. Also, in 2015 media & entertainment only made one of the top ten deals and that was in the fourth quarter.

Investor readiness checklist

The 10 Most Valuable VC Backed Start-Ups in the World

There has been an ever increasing use of technology in our day to day lives. Whether it’s, finding directions, ordering food, booking a cab, buying a book, or finding a contact.

Our lives are at the palms of our hands; we control everything and interact with the world through apps and the internet.

It therefore comes as no surprise that the software industry is receiving the largest amounts of VC funding.

Phone-based apps are currently some of the most valuable startups and many of these are receiving funding from venture capitalists, which is enabling them global amplification.

Let’s have a look at some of the most valuable VC backed startups in the world at the moment.

Biggest startup fundings

Business Stage: Venture Capital Funding Trends

Now, we’ll have a look in which investment stages venture capital investors invested over time.

Venture Capital Funding Trends

Source: Venture Pulse, Q1’17, Global Analysis of Venture Funding, KPMG Enterprise. Data provided by PitchBook, April 11, 2017.

Let’s start with looking at the distribution of venture capital investment by business stage between 2012 and 2015.

VC investments by stage

Source: Mattermark. Where To Get Funded In 2016 That Isn’t Silicon Valley. Jason D. Rowley. January 25, 2016

Angel and Seed-Stage

Angel and seed-stage companies do not receive a lot of funding individually or as a class. However, by looking at the investment activity of VC’s at this stage you can gauge the mood of investors towards a certain startup.

You can also determine what companies will be able to raise funding at later stages depending on how well VC’s receive them at this stage.

According to a 2017 VC report by Crunchbase, the average seed VC funding in the first quarter of 2016 is roughly 38 percent lower compared to the first quarter in 2017, indicating that investors may have just warmed up to newly formed startups this year.

Let’s have a look at the most active seed and angel investors based on the number of investment rounds that each investor participated.

Note that most of these investors are accelerator programs that provide capital to nascent companies only, their selection is not random. A startup must show real potential.

Active Global Seed Investors

Source: Crunchbase. Inside The Global Q1 2017 VC Market. James Rowley April 6, 2017.

Let’s also look at the most notable fundings that have taken place in the first quarter of 2017.

Seed Fundings

Source: Crunchbase. Inside The Global Q1 2017 VC Market. James Rowley April 6, 2017.

Investment into seed rounds traditionally remains low but stable. Now, let’s see how VC’s invested in early-stage businesses during the first quarter of 2017.

You will also note that the industries are quite diverse, there is no concentration in one or two industries as would be expected.

Early-Stage Deals

The early stage is what is commonly referred to as Series A and Series B deals. This is where investment rounds start to get bigger.

A lot more money is invested here in terms of individual companies as well as a class. This demonstrates the confidence of VC investors in the likely success of the businesses at this stage.

According to the Crunchbase report, the average early-stage funding rounds grew by 9 percent between the fourth quarter of 2016 and the first quarter of 2017. The low rate of early stage investments in 2016 indicated a cooling venture market.

The 2017 increase shows that venture capitalists are probably recovering from their previous conservatism and they have decided to take the risk once more.

If you don’t try you’ll never know, right?

Let us also look at the early stage companies, despite their scale, that received the most funding from venture capital investors in the first quarter of 2017.

Early stage fundingsSource: Crunchbase. Inside The Global Q1 2017 VC Market. James Rowley April 6, 2017.

Here you begin to realize an inclination towards apps, software, and technology as would be expected based on the current VC behaviors.

However, note that biotechnology funding is yet to appear amongst the ranks. Could it be that there are just a few initiatives? Or is the VC investor behavior shifting again?

Later-Stage Deals

The Later Stage is what you would refer to as Series C funding and beyond. Later stage investors tend to write checks of more than $15 million.

The average global late-stage funding in the first quarter of 2017 is about 15 percent greater than that of the last 2016 quarter.

The funding rounds at this stage are highly volatile and unpredictable and the averages keep shifting in every quarter. This is attributed to ‘outlier’ rounds (unexpected rounds) that heavily influence the average size for any given quarter.

Let’s look at the most active late-stage investors.

Later stage fundingsSource: Crunchbase. Inside The Global Q1 2017 VC Market. James Rowley April 6, 2017.

VC Hubs: Cities Venture Capitalists love to Invest in

Also highlighted in the Martin Prosperity report, venture capital investments by industry are also concentrated in fairly small geographic clusters.

For example, almost half of all software VC investments are concentrated in the Bay Area, San Francisco and account for more that 25 percent while San Jose accounts for 20 percent.

Software investment has also seen to be concentrated in zip code levels, with the leading zip code being Palo Alto (94301). Palo Alto attracts roughly 6 percent of all software VC investments.

In the United States, venture capital investment across all industries comes from two main regions: the San Francisco Bay Area and the Boston-New York-Washington corridor, which account for more than 40 percent of all global VC investments.

Venture Capital Investment by City (2012)

Rank Metro Venture Capital Investment (millions) Share of Global Capital Investment
1. San Francisco $6,471 15.4%
2. San Jose $4,175 9.9%
3. Boston $3,144 7.5%
4. New York $2,106 5.0%
5. Los Angeles $1,450 3.4%
6. San Diego $1,410 3.3%
7. London $842 2.0%
8. Washington $835 2.0%
9. Beijing $758 1.8%
10. Seattle $727 1.7%
11. Chicago $688 1.6%
12. Toronto $628 1.5%
13. Austin $626 1.5%
14. Shanghai $510 1.2%
15. Mumbai $497 1.2%
16. Paris $449 1.1%
17. Bangalore $419 1.0%
18. Philadelphia $413 1.0%
19. Phoenix $325 0.8%
20. Moscow $318 0.8%
Top 20 Total $26, 790 63.6%
Total- All Metros $42,121 100.0%

Source: Martin Prosperity Institute. VENTURE CAPITAL’S LEADING INDUSTRIAL CLUSTERS. The Geography of Venture Capital Investment by Industry. March 2016.

Global VC investment in 2012 amounted to $42 billion, this is the last year such detailed data is available on a global scale.

The data includes 150 cities and the map below indicates the areas where there’s concentration of venture capital investments.

The largest dots indicate the highest levels of VC investment, which are mainly the East and West Coasts of the United States, megacities in India and China, and the West European region.

The United States of course is the dominant venture capital center, accounting for almost 70 percent of all global VC investments globally. Asia and Europe are a distant second, both accounting for roughly 14 percent.

Global VC investments by region

The United States host the top six investment hubs and twelve of the top twenty.

The top United States six hubs together account for about 45 percent of all global VC investment while the two United States mega-regions alone account for 40 percent of all global VC investments. That is the Boston-New York-Washington Corridor and the San Francisco Bay Area.

However, considerable hubs have come up beyond the United States. For example, London is the seventh largest VC investments, accounting for $842 million in venture capital.

Toronto is the twelfth, accounting for $628 million etc. Note that large metros like New York, London, and Beijing inherently have an advantage due to their size.

Ultimately, VC investment from a global perspective is highly uneven and concentrated in a small number of cities around the world (mainly in the U.S) as can be seen on the map.

Investors are eager to invest in these Business Models

Industries VCs want to invest inTomasz Tunguz used data from Crunchbase to analyze the share of dollars commanded by 16 technological categories between 2010 and 2014 in order to understand VC investment for seed and series A funding for different business models.

Seed investment is marked blue, and series A investment is marked red.

For the purposes of this paper, we shall only go into detail on the most significant business models.

  • Advertising saw a drop in both series A and seed funding from 15% to 5% over a five-year period. This is an indicator of how advertising models have gradually lost favor with investors. This has been heavily attributed to the domination of advertising networks such as Facebook and Google.
  • Big Data driven business models on the other hand saw an increase from 2.5% in 2010 Series A funding to over 7.5% in 2015. Seed investment however remained constant over the four years.
  • Cloud computing, which is the infrastructure that product developers use to build services, remained constant at 4% in both categories of funding over the four years. The business model however experienced slight declines in funding between 2013 and 2014.
  • E-commerce remained flat in Series A investments but declined in seed funding, falling from 15% to below 10%. This can be attributed to an anticipated increase in capital required for e-commerce models, meaning that follow up funding may not be available at the attractive terms it once was for investors.
  • Hardware/software combination models, for example Fitbit, had more than 5% of Series A investments in 2014 but subsequently fell to under 4%. This can be attributed to the fact that public markets have not been able to sustain multiple hardware/software businesses, leading to a loss of faith in the models. For example, GoPro lost 73% of its initial market in 2015.
  • Marketplaces rocketed from 2.5% in seed funding to 10% in four years. This is attributed to the huge successes of companies like AirBnB and Uber. The high growth rate of businesses employing this model has greatly motivated investors. Series A investments, on the other hand, remained fairly steady at 5% of dollars. But given the hefty seed investments, Series A investments were bound to follow suit.
  • SaaS businesses followed a similar trajectory, with seed investors outperforming series A investors. However, for this type of business model, both investment stages increased from 5% to 15% and from 5% to 10% respectively. The opportunity for funding here is very high, with less than 2% (in 2014) of the software market having transitioned to SaaS.

Pitch Deck Course

Shifts and Developments in Venture Capital Behavior

The venture capital industry is volatile and keeps evolving.

The industry has changed a lot over the past decade and this can primarily be attributed to growth of the software industry. Compare the venture capital investor activity in 2010 with that of 2015.

VC investment by sector

Source: Xconomy. Venture Activity Report Charts Surge in Energy and Cleantech Investments, Smaller-Sized Deals.

Venture Funding Activity

I believe this shift will be lasting until the software market becomes saturated due to the large amount of startup money flowing into this industry. Or a new industry manifests itself as more profitable, hence shifting the focus of VC investors.

Some analysts propose that there will be a tech market bubble bust similar to that of the 1990’s dotcom bubble.

Global VC grew by 19% in 2015 with the global funding being between 128.5 and $130 billion, the highest it had been in five years. However, in the United States VC investments in 2016 went up, standing at $69.1 billion from $58.8 billion in 2015.

Global Financing Trends of VC-backed Startups

Source: Infosys. Reinventing Capital Investments. Infosys annual report 2015–16

There was also a decline in unicorn formation in 2016. In 2015 71 unicorns were formed while only 40 were formed in 2016. In the United States seed rounds also went down by 25% and hit their lowest point since 2012.

On the other hand, early and late stage rounds dropped 5% and 14% respectively.

While most high profile VCs will go for seed stage deals, they normally have enough capital to fund the most compelling startups and this has contributed to the stability of Series A and B rounds.

Also, excellent seed-stage funding performance between 2014 and 2015 implies that VC’s who made those seed investments will be looking to follow up in 2017.

This trend also creates a big market opportunity for any investor looking to invest at a later stage. This will also increase momentum for the IPO market; the public market stands to grow when private valuations are high. Already, VC backed IPO market in 2017 seems like it will outperform the 2016 market.

This is beginning with the Los Angeles-based Snap Inc that is reportedly about to offer shares at a target valuation of between $20 billion. If this happens, Snap’s debut will be largest VC backed IPO offer in years.

There are also additional tech unicorns that are generating buzz in the IPO market, for example, Uber, Dropbox, Pinterest, and Spotify.

In recent years, machine learning and artificial intelligence grew between 2015 and 2016, and there is hope for even more investment in 2017. More than 300 businesses raised seed and early stage venture financing in 2016, while only about a dozen got funding in the late stage.

AI venture capital investments

Source: Health 2.0 WinterTech: Will Artificial Intelligence change healthcare? by Eugene Borukhovich, SVP Healthcare.

Additionally, we have seen some recent healthy acquisitions take place, for example Intel’s acquisition of technology company Movidius for $350 million and Samsung’s acquisition of virtual assistant developer Viv.

Quick summary of VC investments in startups

VC investments involve economics and economics work in a cyclical manner, hence it is not impossible for history to repeat itself, or for the unpredictable to happen.

At the very core, VC entails economics and economics essentially entails the study of human behavior, which you have to agree, is often irrational.

This irrationality, therefore allows us to predict the shifts in behavior and trends of venture capital investors only to a certain extent, only to the extent of its history and repetition, but never to a point of certainty.

We have gone through the highest ranking industries in terms of venture capital funding. These are software, biotechnology, and media & entertainment, and lower ones like information technology services in the business model section.

VC’s tend to be more mobile than labor. They will therefore primarily invest in industries where financial capital is the main constraint as opposed to industries where human capital is the constraint.

Additionally, VC preferences keep shifting between industries depending on which industry is perceived to offer higher returns at the time… and in this period in time, that is the software industry.

Higher startup valuation checklist

VC’s are naturally looking to maximize return on invested capital and right now software is doing much better than any other industry (refer to the ten most valuable startups section). So, most VC investments will be directed towards this industry.

VC investments change over time. With the increasing financing of software and biotechnology industries, output and competition may have the effect of lowered returns in the market as numerous companies’ battle for customers. This might result in a shift in VC preference in the near future, where other industries start to seem more viable for investment.

The justification for VC behavior in a nutshell is, VC’s go where the money is.

We have also looked at the geographical regions that attract the most VC and concluded that the two major regions in the United States, the San Francisco bay and the Boston-New York corridor are the two regions in the world a business is likely to find VC funding.

We also examined VC activity by stage and from the discussion; it is evident that it is harder for a company to receive funding at the seed stage compared to later stages. However, companies that receive funding at the seed stage are more likely to receive funding in later stages hence boosting their chances of eventual success.

Finally, we have looked into venture capital activity based on business model, which will inform you as a tech entrepreneur, on the likelihood of your business to receive funding based on its model.

Armed with this information, you can now predict the chances of your business receiving VC funding and with this information you can also readjust or relocate your business to increase the chances of securing such funding. Good Luck with raising money for your startup!

Leave A Comment

Share This