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Venture capital firms invest $71.9 billion, but deals decline, in 2017

Venture capital firms invested $71.9 billion in U.S. portfolio companies in 2017, up 17% from 2016, according to the MoneyTree Report from PricewaterhouseCoopers and CB Insights.

While the value of transactions was up, the number of deals fell for the third consecutive year, to 5,052, down 4.1% from 2016 and the lowest annual total since 2012.

"2017 was a year of records for the VC ecosystem in this millennium," said Tom Ciccolella, partner and PwC's U.S. venture capital leader, in a news release on the results. "In the U.S., we saw a record number of megarounds driving the third highest level of investment in VC-backed startups. ... The U.S. venture capital ecosystem is also changing in terms of the mix of dollars and deals, with a bigger role for megarounds, larger average deal size and a declining trend in deal count."

Megarounds, which are venture capital investments of $100 million or more, hit a high of 109 in 2017, up from 107 in 2015.

Megarounds represented 36% of total U.S. funding in 2017, just below 2015's high of 37%.

"2017 closed strong because of megaround activity — a theme throughout the year. It was a record year for these megarounds and was driven by what we'd describe as the Softbank effect. This is the entry of large, deep-pocketed investors, ranging from Softbank to sovereign wealth funds from around the globe investing in insurgent startup companies," added Anand Sanwal, co-founder and CEO of CB Insights, in the release.

"It is worth noting the pullback in early stage activity and the decline in overall deal activity as compared to recent years. Deals are still being completed, especially the bigger ones, but the early stage activity, which is vital to the VC ecosystem's health, did take a hit. There is a lot of early stage (seed capital) that has been raised so it's likely to bounce back," Mr. Sanwal said.

U.S. seed activity as a proportion of all deals declined to 27% in 2017, the lowest level in five years, and down from 32% in 2016. Early stage activity remained level at 26%, while expansion-stage and later-stage investment rose to 21% and 10%, respectively, up from 19% and 8% in 2016.

In the U.S., a record $5 billion was invested in 444 transactions in artificial intelligence companies last year, up from the $3.9 billion invested in 417 transactions in 2016. More than $1 billion was invested in AI companies each quarter in 2017.

2017 was also a record year for cybersecurity funding in the U.S., with $3.7 billion invested, up from $2.6 billion in 2016. The number of transactions in cybersecurity companies, however, slipped to 226 from 229 in 2016.

Globally, venture capital firms invested $164.4 billion in companies in 2017, the highest level in this millennium, and up nearly 50% from 2016. The number of global deals also rose to a high of 11,042 in 2017, up 11% from 2016.