Unicorns get funding, little start-ups less so

SAN FRANCISCO — What's good for unicorns isn't necessarily good for other tech start-ups.

Such is the climate in the venture-capital world that unicorns — dozens of privately-held start-ups valued at more than $1 billion — are gobbling a higher percentage of VC-funded investments in the U.S., according to a report Thursday from market researcher PitchBook Data.

A record 39% of capital investments, or $8.78 billion, went to unicorns in the second quarter, more than double the $4.06 billion (20%) in the same quarter a year ago.

Uber, Pinterest, Snapchat and Slack led the way in unicorn investments. Ride-hailing service Uber closed $5.6 billion in Series G funding, roughly a quarter of total second-quarter capital raised. Uber is valued at $61 billion. Snapchat, which raised $1.8 billion, is valued at $17.8 billion.

The seismic shift in investments, at a time when unicorns increase and early-stage financing declines, signals venture capitalists are more likely to back companies with proven business plans and higher valuations.

"VCs are more selective about the types of investments they make," PitchBook senior analyst Garrett Black said in a phone interview. "In a bull market, when there was exuberance, they were making bets across the board."

Accel Partners, Insight Venture Partners, Kleiner Perkins Caufield & Byers and other VC firms, for example, pumped large amounts of capital into fewer deals, Black said.

In total, VCs sunk more than $20 billion across 1,906 completed deals in the second quarter. Though the dollar amount was up 11% from the same quarter last year, the number of deals plunged 29%. Late-stage funding, on average, amounted to a whopping $10 million, the second-highest figure of the decade. Last year, it was $11 million.

But the number of first-financing deals with VC involvement was 525, down 38% from the same period in 2015.

An infusion of venture funding might also embolden some unicorns to take the plunge with an initial public offering.

Shares of Twilio (TWLO), the first unicorn to go public this year, soared 92% in their first day of trading in late June.

The cloud computing company's first-day spike made it the largest of four tech IPOs this year, as measured by market value (nearly $2.4 billion). Its initial success could persuade wary Wall Street investors to consider more IPOs after a volatile market, interest-rate uncertainty and steep declines in venture funding all but smothered the notion.

Twilio prices IPO above range, a litmus test for unicorns

Marc Andreessen, co-founder of venture capital firm Andreessen Horowitz, predicted a rush of IPOs in 2017 and 2018 and more mergers and acquisitions this year, at the Bloomberg Technology Conference in San Francisco last month.

Still, public investor demand for tech IPOs remains tepid, says Matt Kennedy, an analyst at Renaissance Capital. He said four tech companies have gone public this year; at this time a year ago, 14 had.

Follow USA TODAY San Francisco Bureau Chief Jon Swartz @jswartz on Twitter.