lewis and clark ventures logo

2018
 BETWEEN  THE COASTS REPORT

Lewis & Clark Ventures was founded with the premise that opportunity is plentiful between the coasts, and that hugely successful companies can be — and are — built here. We’ve known this for a long time, because we’ve lived and breathed it throughout our careers. And even if they’re a bit late to the party, we’re happy to see that the wider startup community is starting to embrace that fact. So for those interested in a little help cutting through the noise, we present the 2018 edition of our refreshed Lewis & Clark Ventures Between the Coasts (BTC) report¹.

ACTIVITY OVERVIEW          DEALS          FUNDS          EXITS          WRAP UP

ACTIVITY OVERVIEW

There are two fundamental benchmarks often used to measure venture capital activity: deals and exits. As one would expect, in 2017 the West (about 4,400 deals worth $45.4B) and East (4,300; $29.7B) continued to dominate the BTC (2,700; $9.7B) with respect to deal flow. When it comes to exits, the same trends held true, with the West (about 374 exits worth $88.2B) and East (346; $41.8B) significantly higher than the BTC (192; $32.1B). On a state level, the traditional startup hubs of Silicon Valley, New York City, and Boston propelled California, New York, and Massachusetts to the top of the lists of deals and exits nationwide, measured by both number and capital invested/exit value. Within the BTC region, the Austin, Dallas/Fort Worth, Denver/Boulder, and Chicago ecosystems drove Texas, Colorado, and Illinois to the top of the lists.

deals by state graph
capital invested by state graph
Exits by state BTC graph
Exit Value by State Graph

However, the raw numbers of deals and exits don’t do justice to the activity actually happening throughout the country or nuanced deal dynamics, such as regional differences in valuation, industry concentration, and availability of capital. In the subsequent sections of this report, we go a level deeper to paint a more complete picture of the state of venture capital between the coasts and beyond.

1. Data sourced from PitchBook. As Pitchbook is a dynamic database, data is subject to change. Unless otherwise noted, dollar figures are medians.

DEALS

Funding rounds are the most basic unit of VC activity. In 2017, the BTC region continued to follow the nationwide deal trend that emerged in 2015: fewer deals, but with larger round sizes. Deals for each region fell to roughly 2012 levels, while total capital invested rose for the coasts and stayed roughly flat for the BTC region.

DEALS OVER TIME

graph

CAPITAL INVESTED OVER TIME ($B)

graph
BTC BREAKDOWN

Though the BTC region encompasses a huge swath of the country, 12 states have combined to make up nearly 90% of BTC deal activity each year since 2012. They continued dominating BTC deal activity in 2017.

graph
TOP 10 BTC DEALS IN 2017²
Qualtrics logo

$180M
April 2017
Provo, UT
Media & Information Services

Bright Health logo

$160M
June 2017
Minneapolis, MN
Life & Health Insurance

BioMotiv logo

$146M
July 2017
Cleveland, OH
Drug Discovery

Domo logo

$115M
December 2017
American Fork, UT
Business/Productivity Software

Uptake logo

$117M
November 2017
Chicago, IL
Media & Information Services

armor logo

$89M
April 2017
Richardson, TX
Network Management Software

Pivot 3 Logo

$80M
August 2017
Austin, TX
Systems & Information Management

Peloton Therapeutics Logo

$75M
March 2017
Dallas, TX
Drug Discovery

Alkami logo

$73M
August 2017
Plano, TX
Financial Software

Xeris Pharmaceuticals logo

$71M
May 2017
Chicago, IL
Pharmaceuticals

STAGE DYNAMICS

Round sizes are increasing in the BTC region at each stage (just as they are in the rest of the country) with respect to both capital invested and valuation. In 2017, companies in the BTC region continued to leverage the capital efficiency afforded them by the lower cost of living in the middle of the country by raising relatively smaller rounds at lower valuations than their coastal counterparts.

graph
BTC INDUSTRIES BREAKDOWN

The BTC region has long been favored by healthcare entrepreneurs, due to the region’s concentration of world-class medical centers and research institutions and the proximity it affords to patients and customers. Accordingly, in 2017 the BTC region made about 10% more of its deals in healthcare technology and about 10% fewer of its deals in general information technology than the West Coast. This continues a longstanding BTC emphasis in healthcare innovation, of which Lewis & Clark is proud to be part of.

graph

2. Outcome Health’s $510M round in June 2017 is not included, given pending fraud allegations against the company.

FUNDS

It may seem obvious, but people sometimes forget that there are two sides to every venture deal: the entrepreneur and the investor. Without access to capital, promising startups struggle to get past the idea stage. This is particularly the case between the coasts: since 2012, the BTC region has closed new VC funds totaling about 10% of the total capital closed in the West, and about 20% of the total capital in the East. In 2017 this distinction was even more stark, with the BTC closing just under $900M in new VC funds compared to the West’s $20.5B and the East’s $11.8B³.

NEW VC FUNDS4
Fewer new funds across all regions

Consistent with many other VC trends, investors in the West have tended to close the most new funds each year, with the East second and BTC last. The number of new funds closed each year has remained relatively stable since 2014, and in 2017, new funds closed fell across all regions.

graph
NEW VC FUNDS4
Fewer new funds across all regions

Consistent with many other VC trends, investors in the West have tended to close the most new funds each year, with the East second and BTC last. The number of new funds closed each year has remained relatively stable since 2014, and in 2017, new funds closed fell across all regions.

graph
TOTAL RAISED BY NEW FUNDS ($B)
New AUM declining in West and BTC; increasing in East

While the total capital raised by new funds in the BTC and East regions has remained relatively constant since 2012, capital raised by new funds in the West has tended to increase year-over-year. For all the talk about excessive capital in the startup ecosystem, 2017 actually saw a decrease in overall capital raised by new funds, with the West falling a significant $6B, the East rising slightly by $2B, and the BTC falling from $3.4B of new capital in 2016 to a precipitously low $860M.

graph

While the total capital raised by new funds in the BTC and East regions has remained relatively constant since 2012, capital raised by new funds in the West has tended to increase year-over-year. For all the talk about excessive capital in the startup ecosystem, 2017 actually saw a decrease in overall capital raised by new funds, with the West falling a significant $6B, the East rising slightly by $2B, and the BTC falling from $3.4B of new capital in 2016 to a precipitously low $860M.

graph
NEW FUND MEDIAN SIZE ($M)
Oversized funds still emerging on the coasts

In 2017, median fund sizes continued growing steadily across all regions. However, West and East median fund size are still far below their averages (about $170M in both), while BTC median fund sizes are roughly the same as their average ($28.7M). This contrast in median fund size spread is evidence that the recent rise of the coastal “mega-fund” is not merely anecdotal. Time will tell if the East’s huge increase in 2017 will persist, or if 2017 will turn out to be an outlier.

graph
NEW FUND MEDIAN SIZE ($M)
Oversized funds still emerging on the coasts

In 2017, median fund sizes continued growing steadily across all regions. However, West and East median fund size are still far below their averages (about $170M in both), while BTC median fund sizes are roughly the same as their average ($28.7M). This contrast in median fund size spread is evidence that the recent rise of the coastal “mega-fund” is not merely anecdotal. Time will tell if the East’s huge increase in 2017 will persist, or if 2017 will turn out to be an outlier.

graph
DEALS BY FUND REGION
graph

Funds in each region have long demonstrated a bias for deals within their regions. Over the past few years, BTC deals have made up about 60% of BTC funds’ deals, East deals have made up about 55% of East funds’ deals, and West deals have made up about 70% of West funds’ deals5. Though the West and East regions both marginally increased their deals in the BTC region in 2017, coastal involvement in BTC deals is still relatively paltry. This seems to suggest that coastal investors may not be putting their money where their collective mouth is when it comes to investing in between the coasts — though emerging trends among BTC returns at exit suggest they may be missing out (see Exits section).

TOP 10 BTC FUNDS RAISED IN 2017
s26 Ventures Growth logo

S2G Ventures Fund II
$180M
September 2017
Chicago, IL

Revolution logo

Revolution “Rise of the Rest Seed Fund” 6
$150M

December 2017
Washington, DC

Origin Venture logo

Origin Ventures IV
$81M

April 2017
Chicago, IL

Scaleworks logo

Scaleworks Fund
$60M
February 2017
San Antonio, TX

Peak Ventures logo

Peak Ventures Fund II
$53M

February 2017
Lehi, UT

Northwestern Mutual logo

Northwestern Mutual Future Ventures
$50M

January 2017
Milwaukee, WI

Ludlow Ventures logo

Ludlow Ventures Detroit I
$45M

June 2017
Detroit, MI

Mutual Capital Partners logo

Mutual Capital Partners Fund III
$43M
March 2017
Westlake, OH

Claritas Capital Logo

Claritas Opportunity Fund IV
$40M

January 2017
Nashville, TN

Nashville Capital Network logo

NCN Partners Fund
$34M

July 2017
Nashville, TN

3. In all portions of this section except for Deals by Fund Region, we include only funds raised in 2017 that are explicitly described as venture capital funds or angel investors. For simplicity, we consider all funds separately, rather than combining the total raised/deployed by investors across all funds raised in a given year.

4. 2017 figures for New VC Funds and Total Raised by New Funds may be downwardly biased given that fund closes are not always immediately publicly announced in a timely manner, but any bias should be the same across all regions.

5. Here, we include venture capital deals from all funds that participated in at least one venture financing, even when the participating fund is not explicitly described as a venture capital fund.

6. The Rise of the Rest Seed Fund is technically not headquartered in the BTC region, but given its strong commitment to investing in overlooked communities between the coasts, we chose to include it in our listing.

EXITS

The “finish line” for successful entrepreneurs (and investors) is exit, generally by acquisition or IPO. Coastal exits continued to dwarf BTC exits in 2017. But the aggregate number of exits doesn’t tell the entire story; in particular, converging exit valuations and regional differences in cash-on-cash returns add valuable context.

EXITS OVER TIME
Exits declining in West; increasing in BTC and East

Though exits in the West notably decreased for the third year in a row, exits in the East and BTC both recovered from their 2016 decline and reached near-highs.

graph
EXITS OVER TIME
Exits declining in West; increasing in BTC and East

Though exits in the West notably decreased for the third year in a row, exits in the East and BTC both recovered from their 2016 decline and reached near-highs.

graph
VALUATIONS AT EXIT ($M)
High coastal prices not yielding high exits

Exit valuations have been much more compressed among the three regions over the past few years, with the BTC region overtaking the East in 2017 and quickly gaining on the West.

graph
VALUATIONS AT EXIT ($M)
High coastal prices not yielding high exits

Exit valuations have been much more compressed among the three regions over the past few years, with the BTC region overtaking the East in 2017 and quickly gaining on the West.

graph
CASH-ON-CASH RETURNS7
BTC still doing more with less capital

To further explore this point, we estimated cash-on-cash returns in each region, assuming companies raise Series Seed, A, B, and C rounds prior to exit. For five of the last six years, the BTC region has maintained the highest ratio of any region.

graph
CASH-ON-CASH RETURNS7
BTC still doing more with less capital

To further explore this point, we estimated cash-on-cash returns in each region, assuming companies raise Series Seed, A, B, and C rounds prior to exit. For five of the last six years, the BTC region has maintained the highest ratio of any region.

graph
TOP 10 BTC EXITS IN 20178
Naurex logo

$1.7B
August 2017
Evanston, IL
Drug Discovery

Cologix Logo

$1.2B
March 2017
Denver, CO
IT/Data

SendGrid logo

$805M
November 2017
Denver, CO
Communication Software

Tolero Pharmaceuticals logo

$780M
January 2017
Lehi, UT
Drug Discovery

Zirmed logo

$750M
November 2017
Louisville, KY
Enterprise Healthcare

Apellis logo

$690M
November 2017
Crestwood, KY
Drug Discovery

Shipt logo

$550M
December 2017
Birmingham, AL
Social/Platform Software

Encore Vision logo

$465
January 2017
Fort Worth, TX
Pharmaceuticals

Calimmune logo

$416M
September 2017
Tuscon, AZ
Biotechnology

E/evate logo

$257M
April 2017
Fort Worth, TX
Consumer Finance

The definition of an “exit” is not always as straightforward as it might seem. We do not include exits that were the result of a public-to-private acquisition, second IPO, or similar transaction, or that were not reported as “VC-backed” at time of exit. However, we feel these exits are worth mentioning, as they are helpful to frame the activity going on between the coasts. Prominent $500M+ exits in 2017 fitting these criteria include but are not limited to: LifeLock ($2.3B), The Spectranetics ($2.2B), Vivid Seats ($1.5B), CoverMyMeds ($1.4B), Active Network ($1.2B), Vascular Solutions ($1.0B), Idera ($1.1B), SailPoint ($1.0B), Inteliquent ($800M), HighJump ($750M), RetailMeNot ($630M), and RXBAR ($600M).

7. Similar trends emerge when comparing regional exit valuations to valuations at the Series C stage.

8. Dollar figures for exits by acquisition are often not announced, and so these exits cannot be analyzed, here.

WRAP UP

The back-and-forth among Silicon Valley purists and Midwestern diehards can sometimes make it difficult to ascertain what’s actually happening on the coasts and between them. While the coasts certainly still dominate the middle of the country in the sheer amount of deals and exits, a number of underlying trends suggest that the BTC region is similar to the coasts in many ways — and different in key others.

On one hand, the BTC region shares many of the same trends with the coasts. Deal count is shrinking, while total capital invested is rising. Deal sizes and valuations are rising. VCs are raising fewer funds each year, and those funds are, on average, larger. Investors still prefer to deploy most of their capital in their backyards.

But there are distinct differences as well. Some are continuations of longstanding trends. The BTC and East regions are continuing to see more healthcare deals than the West. BTC round sizes and valuations are still considerably smaller than their coastal counterparts, especially at later rounds. As a result, for the fourth year in a row, the BTC region had significantly higher cash-on-cash returns than the other regions.

Meanwhile, some trends are more recent. West companies are exiting less frequently and choosing to stay private longer as BTC and East companies are exiting more frequently. BTC exit valuations are rising to levels competitive with the coasts. And even though fund sizes are rising everywhere, the “mega-fund” trend seems to be a mostly coastal phenomenon.

As America’s heartland continues its ascent to VC relevance, it’s important that we — West coasters, East coasters, and BTC-ers alike — keep a level head. We must celebrate our successes and advantages while acknowledging our failures and shortfalls. Maintaining a baseline understanding of deal, fund, and exit activity across the regions is a necessary part of that. Hopefully, this report contributes to that understanding.

Lewis & Clark Ventures was founded by former operators with the conviction that innovation and entrepreneurial talent are plentiful between the U.S. coasts. We deploy series A / B stage growth capital into companies operating within sectors that include software, agtech, and digital healthcare.  We believe there is an incredible number of gifted entrepreneurs and exciting companies operating in our own backyard, and we are here to solve their capital needs and enable their growth.

Keep up-to-date with the latest from Lewis & Clark Ventures on Twitter, Facebook, and LinkedIn. For comments, questions, or suggestions, please contact austin@lacventures.com.

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