Pull back from PE firms contributes to decline in Q2 venture investment

U.S.-based venture investing slowed slightly for the second consecutive quarter, according to a new report by EY.

Startups nationally raised $29.3 billion in Q2, a 2 percent decrease from the first quarter of the year, according to EY’s calculations.

The small reduction in the most recent quarter is “healthy,” especially since capital deployment for the first half of the year is ahead of where it was at the same time last year, said EY Venture Capital Leader Jeff Grabow.

The quarterly decrease was driven in part by a decline in the amount of money private equity firms poured into venture-backed companies. PE firms cut their deployment to $1.2 billion, a 74 percent reduction from $4.7 billion invested in the first quarter of 2019, EY calculated.

Equity funding rounds of more than $100 million continued during the quarter, following a recent trend in investment activity. But mega deals accounted for a smaller portion of total dollar volume deployed than in Q1.

Mega rounds comprised 44 percent of all capital invested in Q2, a decrease from 50 percent in the prior quarter, Grabow said.

Nearly half of all capital went to financing later-stage deals, and these companies took a larger portion of all VC deployments than in the recent quarters.

EY also predicts that VC activity will remain strong in the near term. Some of the factors EY said will drive investments are:

  • Unicorn IPOs. Successful public offerings will create wealth that is likely to be reinvested in the asset class. Additionally, IPOs will draw interest from investors who previously did not allocate to venture.
  • Corporate venture capital. Corporations will continue to want to connect with innovation economy and will often do this through investing in new companies.
  • Roll out of 5G. There will be very large expenditures by telecommunications providers in the next few years. This could attract opportunities for startups and additional venture investment.