After three years of strong growth, venture capital financing activity slowed noticeably in 2016. According to data published by Pitchbook and the National Venture Capital Association, companies raised $69.1 Billion in 2016 from angels and institutional investors in 8,136 deals. While these numbers beat the industry average for the past 10 years, they are well below the lofty heights reached in 2015, when companies raised $79.3 Billion in 10,468 deals. The decline in dealmaking cut across all stages and nearly all industry sectors, but it was particularly acute for early-stage startups. The number of companies receiving their first VC equity investment (typically a “Series A” financing) in FY 2016 was down nearly 30% from 2015, and has now fallen for six consecutive quarters. The amount raised in those transactions fell to its lowest level since 2013.

Although the overall numbers indicate that investors are pulling back, the devil is in the details, and the details suggest there are reasons to be optimistic. For one thing, 2014 and 2015 saw record levels of financing activity, and 2016 was still well above the historical average, to say nothing of the doldrums of 2009. When put in context, 2016 was a strong year. Also, while the number of companies raising capital and the number of overall deals fell across all industry categories in 2016 relative to 2015, the pullback was much more pronounced for the Media, Consumer Goods and Commercial Services sectors, while companies in the Software and IT Hardware sectors actually saw a slight uptick in the amount of capital raised. This suggests that some of the pullback is a result of investors being more disciplined and selective. Finally, VC funds raised more than $40 Billion in 2016, an increase of nearly 20% over 2015 and the most by far in the past 10 years. Raising a new fund takes a significant amount of time and energy, so it’s not surprising that a strong year for funds would coincide with a decline in financing activity. More importantly, VCs will be looking for ways to put all that new dry powder to work in 2017. All this suggests it’s too soon to say whether investors are closing their wallets or merely catching their breath after a flurry of investment activity over the past few years.

While the headline numbers in 2016 are eye-catching, arguably the most interesting development in the financing of startup companies in 2016 was the start of securities-based crowdfunding in the U.S. Since the SEC’s “Regulation Crowdfunding” took effect on May 16, 2016, startups have had the ability to raise capital by selling securities to nearly anyone, and the early results are promising. According to filings made with the SEC, as of December 31, 2016, 179 companies had filed to raise capital under Regulation Crowdfunding, and 34 of them had completed offerings in which they raised, in the aggregate, approximately $10 million. While $10 million is a drop in the ocean of startup financing, as the industry works out the kinks, crowdfunding will become an increasingly popular means of raising seed capital. As this happens, we will be watching carefully to see how much crowdfunding increases overall funding for startups, as opposed to supplanting angels and other seed-stage investors.