VC activity has trended higher for the second consecutive quarter. According to Pitchbook’s latest analysis, Limited Partners (LPs) remain committed to the asset class with 87 percent of VC funds hitting their targets, tracking 2017 as the ninth consecutive year the percentage of funds to hit their target has increased. On the deal front, value has increased 53 percent since 4Q 2016 as VCs focus on a high number of mega-financings and pull back on the angel and seed stage. The exit market is also on the mend following a dismal 2016, with five VC-backed unicorn IPO exits, pacing 2017 as having the most unicorn exits ever.

First-time funds break records

On the heels of a record fundraising year in 2016 ($41 billion), LPs continue to show strong interest in the asset class, with 58 VC funds raised in Q2 contributing an additional $11.4 billion of dry powder. This quarter there were several groundbreaking funds raised, most notably New Enterprise Associates 16, which raised a $3.3 billion fund, making it the largest VC fund raised to date. Additionally, first-time fund managers hit the ground running in the first half of this year with $1.5 billion raised across 15 funds – the highest level of first-time fundraising activity in the past decade. The increased interest in first-time fund managers is likely attributed to their hyper-focus on specific niche markets attracting investor interest (for example, financial services-focused Centana Growth Partners and real estate-minded Fifth Wall Ventures). Coupled with its characteristic smaller vehicles and attainable targets, first-time fund managers have been well-received by LPs in Q2.

Mega financings could set new record

In the second quarter, deal count and value increased considerably with $21.78 billion deployed across 1,958 companies, up from $15.9 billion invested in 1,954 companies in Q1 2017. What differentiates Q2 from earlier quarters is deal size – Q2 saw 34 transactions of at least $100 million in value, up from just 12 transactions in Q1. Thus far, 2017 is pacing to have the largest number of rounds of at least $50 million in the last decade. The strong fundraising environment has allowed VCs to pump more capital into later stages companies looking to continue growing and scaling before considering an exit. In fact, the top 10 deals of the quarter accounted for $4.3 billion, representing nearly 20 percent of all dollars invested in Q2.

Meanwhile, the number of completed angel and seed transactions has now declined for eight consecutive quarters. What’s more, first-time financings are being completed at the lowest proportion of any year, compared to the number of overall deals. Just 29 percent of completed financings in 2017 have been first-time funding rounds. The primary reason for the decline in these stages is a fundamental change in how startups are fundraising early on. For instance, the prevalence of incubators and accelerators has helped early stage startups refine their business model and secure capital at the outset, delaying the need to seek out traditional VC. Additionally, it’s never been cheaper to start a business thanks to advancements in technology – companies can now operate on a smaller amount of capital for longer periods of time, further reducing the urgency for angel and seed financing.

2017: Most unicorn IPOs ever, despite slow exit market

On the heels of one of the slowest years on record for all VC-backed IPOs in 2016, the first half of 2017  has already experienced historic IPO activity. Only halfway through the year, we’ve already seen five unicorn IPOs (MuleSoft, Snap, Okta, Cloudera, and Blue Apron), with another on deck (FourScout). So 2017 is on pace to hold the record for most unicorn IPOs, beating out 2015 with seven. But this uptick in unicorn public debuts has been a long time in the making. As companies take longer to work through each stage of financing, lifecycles have extended, allowing more time to gradually increase valuations. At last count, the average time to exit stood at roughly six years, up from less than five years a decade ago.

Overall, exit activity continues to slide, with $10.5 billion in exit value across 156 transactions in Q2, down from $17.2 billion in value via 211 exits this same period last year. While the lack of exits can be troublesome for VCs, the market is adapting to a new norm characterized by outsized exits. The four largest exits so far in 2017 have accounted for 48 percent of the total exit value. Furthermore, startups acquired so far this year have secured a median exit post-valuation of $160.5 million, which exceeds peak levels in 2014 at $120 million. These outsized exits are attracting private equity investors. This quarter’s report shows an increase in private equity buyouts as another exit route, accounting for 19 percent of exits so far in 2017, compared to 13 percent in 2016.

The trend of companies staying private longer raises questions over the efficiency with which capital is being deployed, but VCs are determined to adjust to this dynamic and keep the venture ecosystem healthy. And their efforts are already paying off. Despite potentially delayed returns, LPs continue to show confidence in the asset class and VC’s ability to create and realize value at a reasonable pace. There will continue to be lingering question marks in the new environment of mega funds and unicorns, but for now, VCs are successfully adapting.

Nizar Tarhuni is Analyst Manager at PitchBook.