Venture capital investment in the United States hit an all-time high in the first quarter of 2018, according to data released by Pitchbook on Wednesday. In the first three months of the year, U.S.-based venture capital firms shelled out $64 billion to fund more than 3,000 startups, a 25 percent increase from the fourth quarter of last year. That’s about $1.3 billion per month. Emerging markets like China and India have been doling out venture capital to new startups for years, but the U.S. has lagged behind in funding new businesses until now. What changed? It’s a number of factors. Access to capital has been made easier thanks to the emergence of venture capital funds. The JOBS Act passed in 2012 opened the floodgates for smaller investors to come in and invest in start-ups. And the internet has allowed startups to scale their customer base without the need for brick-and-mortar stores.
WHAT IS VENTURE CAPITAL FUNDING?
Venture capital funding is the process through which funds are raised for new businesses by venture capitalists. Venture capital is a form of risk capital, which is money used to try out potentially profitable ventures. In the business world, venture capitalists are early-stage investors who back new companies to help them grow by providing them with the capital, expertise and access to resources that comes with experience. The investment process can take many years and is typically based on an agreement between the investor and the company. There are many different forms of venture capital, including real estate, private equity, venture debt and public equity.
VENTURE CAPITAL INVESTING IN THE US
U.S.-based venture capital investment increased by 25.8% in the first quarter of 2018 when compared to the fourth quarter of 2017, reaching $33 billion during the first three months of the year. That’s the highest Q1 investment total ever, and also the first time investment volume has been higher than it was at the same time in 2017. Investment volume was up 19% from the final quarter of 2017, even with a 5% decline from the third quarter of 2017. Overall, the year-to-date investment total of $64 billion is the highest level ever.
WHY IS AMERICA SUDDENLY SO INTERESTED IN FUNDING STARTUPS?
The year 2017 was a big one for startups, with a huge number of IPOs, acquisitions and funding rounds in the wider public spotlight. The year saw companies like Uber, Airbnb and Square all go public, raising millions in capital and attention for their respective industries. But the real story of 2017 was the year’s number of funding rounds, which totaled more than 2,000 deals, more than any other year on record. That brings in billions of dollars of new capital to fuel the business world.
WHERE DOES VENTURE CAPITAL GO?
The most popular areas of investment among venture capitalists in the U.S. were digital media, financial technology, and health and wellness, according to Pitchbook’s data. The data also shows that while tech is the most popular sector overall, the health and wellness and media sectors also saw significant growth in investment volume in the first quarter of 2018.
TO GET FUNDING, U.S. STARTUPS TURN TO ANGEL INVESTORS
Angel investors are people who choose to be an active part of the entrepreneurial process rather than keeping their money in the bank or putting it in an IPO, which is known as a venture capitalist (VC). Angel investors are typically friends and family members of founders or early employees of a company looking to get involved in the start-up world. They often invest a small amount of money, sometimes called a seed round, in a startup. Angel investors usually invest their own money, but they don’t expect to get it back because they know the risks involved in starting a business. They offer access for startups to get funding without going through a bank or large, more traditional investor. Angel investors typically invest in early stages of a business and can provide advice, mentorship and networking opportunities to help startups grow.
BOTTOM LINE
The amount of venture funding in the U.S. is growing, the conditions are right for growth, and investors are ready to take the risk. The next question is, what’s next for the venture capital industry? While the rise in venture funding is real, and likely caused by the improvements made in the U.S., it’s not clear if the trend will continue. In the next few years, we’ll get a better sense of what the future holds for venture funding when we look at the data in the second quarter of 2018.
