At the end of Q3-2017, Crunchbase famously reported that projected near-term global venture “deal and dollar volume” would revisit “post-Dot Com highs.” The numbers matched up. Q3-2017 was the fourth consecutive quarter of growth for both deal and dollar volume, surpassing previous highs reached in 2016. Through Q1-2018, public markets showed some volatility, but venture deals continued to close at a historically accelerated pace. Global seed and early stage deal volume also appeared to achieve another banner quarter in Q1-2018 — presenting a picture of strong demand for seed and early-stage deals globally.
Early Stage Startup Funding is Lagging and Health Tech is Further Behind
The U.S. early stage venture market, however, isn’t meeting that global metric. In my team’s recent analysis of Pitchbook data on U.S. early-stage ventures — deals valued at $10 million or less — we saw a sharp contradiction between the state of early stage funding in the U.S. and the trend Crunchbase reported.
By our analysis, early-stage companies in the U.S. are finding it harder to close financing. In fact, Q1 2018 was the lowest quarterly deal count since Q4 2013, with both deal and dollar volume contracting. Within one year, deal volumes between Q1 of last year and Q1 of 2018 dropped a whopping 31 percent.
And, as we detail in our report, the health tech sector is looking particularly rough. From Q1 of 2017 to Q1 of this year, deal volumes in early-stage health technology dropped by 39 percent — a drop we haven’t seen in the last eight years.
Why the funding squeeze?
Of course, there are many potential causes that may be driving a flight of early-stage capital away from the sector. Increased uncertainty around policy may be impacting risk-sensitive early-stage investors. The emergence of bright and shiny sectors, such as biopharma, may not present capital efficient opportunities for traditional seed or angel investment. Or, given the run-up to the sector’s peak in 2016, smaller investors might just need a breather.
But, whatever the reason, it seems clear that early-stage health technology investment is getting squeezed — that is, health tech investors seem to be favoring larger and later rounds, and seed investors seem to be sitting on the sidelines. By taking advantage of this relative lack of early-stage capital in the near term, early-stage health tech investors will be able to generate outsized returns. You can read the entire report by clicking on the image below.