Despite an uneventful opening act, the 2017 NYC seed market continues to inspire optimism

The pace of seed investments in New York City slowed again in Q1 2017, as VCs maintain the cautious pace that began to settle in last year. We now find ourselves squarely in the midst of the “normalization” period that industry leaders have been predicting over the last several quarters - a not unwelcome respite from the furious and overly frothy investment pace of 2014-2015.

And so, despite a somewhat disappointing 20% slide in deal volume from Q4 2016 - a 61% drop YoY - early hints of spring are in the air. The VC industry continues to find itself amid a swarm of budding optimism regarding its 2017 prospects. The year is widely expected to be one of rebuilding and so far, 2017 seems to be living up to these expectations. Across the country, $16.5BN was invested in over 1,800 companies in Q1 2017, and though it’s still early, PitchBook predicts a healthy level of investment for the year, more in line with the historic norms of 2012-2013.  

The 35 NYC seed deals reported for Q1 rang in a total of $58MM, down 16% from Q4 and 50% YoY, though average deal size has continued to increase. The average check in Q1 was $1.7MM, up 6% from Q4 and 31% from Q1 2016.

CLICK HERE FOR THE FULL BREAKDOWN OF Q1 DEALS AND TRENDS

 

(The Primary NYC Seed Deal Report covers all NYC Seed deals - which we define as $250K-$3.5MM - that have been publicly announced in the quarter. We know there are deals that have closed but not yet been announced, including some of our own, and those will be added once they are public. If you know of any deals that we’ve missed in this report, please contact us at info@primary.vc.)

A DRAMATIC 2016 RATTLED NERVES AND PURSE STRINGS

While an air of optimism hangs over 2017, the wounds are still fresh from a year that was shaky along a number of dimensions, with a series of confidence-rattling events that materially impacted investor appetite. Growth worries in Q1, Brexit in Q3, and an unpredictable US election in Q4 caused a huge amount of uncertainty in the market, which also deterred public filings.  

In response to overall market uncertainty, the VC industry exhibited an overall tightening in 2016, with investors taking a more cautious, disciplined approach to investment prospects. Across the country, angel and seed activity dropped 43% from Q2 2015 to Q4 2016. New York City’s seed market witnessed a similar decline; at 309 deals, total deal volume in 2016 was down 34% from 2015, with a 25% fall in total funding.

INVESTORS RETURN TO FUNDAMENTALS

In this rebuilding period, we expect to see VCs taking more time to evaluate investments and conduct thorough due diligence. Investors remain steadfastly focused on those companies that demonstrate a strong business plan and path to profitability, in addition to focusing on supporting the growth of their existing investments. And while overall deal activity has taken a hit over the past five quarters, there is no shortage of investors willing to cut large checks for market-leading and defining companies. In NYC, 23% of Q1 deals were in the $2.5MM-$3.5MM range - up 7% from Q4 and 10% YoY - while 63% of Q1 deals fell into the $1MM-$2.5MM funding range. Undersized seed deals - those below $1MM and thus unlikely to fund more than a year of the target company’s operations - seem to have suffered most, and for good reason. In Q1, there were no reported seed investments under $500,000.

Notably, too, NYC continues to grow as a Bay Area VC destination. From 2010-2016, the city was the highest out-of-market recipient of investment capital from Silicon Valley investors, and saw twice as much funding as Boston, the second-largest target of Bay Area dollars. We expect this trend to persist as the number of top-quality opportunities coming out of the city continues to grow.

MACRO FORCES POINT TO "GO"

The macroeconomic factors that have led so many to express their bullishness about the 2017 VC market are still firmly in place. As these forces continue to play out, we will closely monitor their impact on investor appetite.  

  • IPO uptick looks promising: It’s safe to say that the IPO market for VC-backed companies will be stronger than last year’s showing, in which tech IPOs fell 54% from 2015. But Q1 saw just seven venture-backed IPOs, raising a total of $4BN. The initial success of the Snap and Mulesoft IPOs, along with a number of tech filings already on tap for April - including Okta and Yext - signal a strong IPO year ahead. And there’s good news for NYC beyond just Yext, with increased murmurings of hometown companies in the 2017 IPO pipeline, including AppNexus, FanDuel, SeatGeek, WeWork, Blue Apron and DigitalOcean.
  • VC firms are rife with cash: Until late last year, the VC market was on an unprecedented run of fundraising at the fund level. VC firms raised $41.6 billion in 2016 - the most since 2001 - and Q1 was another strong showing, with 58 funds having raised $7.9BN, according to latest PitchBook data. Full coffers, combined with decreased startup valuations, should translate into a steady flow of VC investment activity.
  • The new administration’s silver linings: Overall, investors are beaming over the well-above-average performance of the Dow Jones Industrial Average, which topped 20,000 for the first time in January 2017. Additionally, the speed and extent of the administration’s promises of pro-growth policies, tax cuts and incentives for corporate repatriation of capital could increase VC investments and opportunities for exits. It’s not all good, though; the administration’s enactment of a longer visa process for foreign-born founders may strain company growth and, in some cases, prevent foreign-born founders from securing funding due to visa status.
  • Corporates think outside of the box: Over the course of 2016, there was a massive shift in the risk-taking behavior of big corporate titans as disruptive forces extend their reach to virtually all industries. The last 12 months alone have witnessed Walmart’s acquisition of Jet.com, Unilever's acquisition of Dollar Shave Club, and GE Digital’s acquisition of ServiceMax. And despite the pull-back in overall VC investing over the last year, corporate investing has remained high, indicating that the institutional shift to more innovative approaches will persist as established companies look for a competitive edge. According to a January 2017 survey of corporate VCs, 50% of corporates said they plan to invest even more in 2017.

 

INDUSTRIES TO WATCH

Putting families first

Q1 saw a ramp-up in innovation focused on products and services for children and young adults. These include apparel company Maisonette; video platform Overtime; mobile carpooling app GoKid; and smart piggy bank app ERNIT. This is an interesting market given the high volume of spend controlled by mothers, and the increasing impact of technology on how we raise and manage our children's lives.

Sensory overload

Next-gen content and media platforms continue to emerge across a variety of mediums, connecting consumers with the content that matters most to them. The quarter saw deals for audio platform Anchor; serialized fiction app Radish, which replicates a model that has already had huge success in East Asia; Keli Network, a social video publisher that distributes engaging content for Millennials via social and mobile channels; and EntryPoint, which allows creatives to make and share immersive web experiences.

New ways to connect with consumers

Q1 showed a resurgence in marketing tech as brands continue to seek new ways of reaching consumers. Investments in companies like Dash Hudson, which helps companies grow and monetize via Instagram and Shapchat, and Popwallet, a mobile wallet marketing automation platform, indicate that companies are willing to test new channels to hit their marketing targets.

Mobile remains king of tech

Ubiquitous smartphone penetration continues to create new market opportunities for enterprising startups. Q1 saw funding for Universe, which offers mobile website development; mobile workforce management platform Lighthouse.io; and Clark, a mobile virtual assistant for tutors.

CLICK HERE FOR THE FULL LISTING OF ALL SEED DEALS ANNOUNCED IN Q1.

Primary NYC Seed Deal Report: Q1 2017


RELATED POSTS