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Global VC Financing Down Again in Q1 2016, Europe Steadies, Says Latest CB Insights / KPMG Report, Blaming Concerns Over China Slowdown, American Elections

The latest global downturn in global VC funding activity may only be temporary, suggests a new report from CB Insights / KPMG

The global downturn in Venture Capital financing activity has continued into Q1 2016, according to the latest report from CB insights, in conjunction with KPMG.

After experiencing a significant correction in Q4 2015, when both the number of deals done globally fell from 2,141, to 1,907, and volumes dropped to $27.7 billion from $39.0 billion, numbers have declined again, to 1,829 deals and volumes to $25.5bn.

According to CB Insights, however, the latest decline is likely to be a term short one, attributable to concerns over a slowing Chinese economy and VC firms keeping their powder dry whilst they wait to see the results of the upcoming Presidential elections in the US.

US holds steady in face of tougher market conditions

Deal activity in the US has declined for a third straight quarter, although overall funding volumes increased slightly, to $14.8 billion from $14.0 billion across 1,035 deals.

Late stage US deal volumes have fallen by over $10 billion to $21.5 billion from $34.5 billion in Q3 2015, and the share of seed deals fell to just 22% in Q1 2016, outpaced by Series A deals in a reverse of previous trends. Early stage deals remain high, however, matching last quarter’s median figure of $3m, up 50% year on year.

Europe also steady but seed share falls

In Europe, activity has steadied after Q4 2015’s disappointing results. Funding was up 8% to $3.5bn, but the number of deals, 338, marked a second successive quarterly decline.

Seed share fell below 40%, its fifth successive quarterly decline, whilst, as in the US, the overall share of Series A rounds grew, to more than 25%.

In the UK, startups raised $1.3bn in funding across 105 deals, a decline that could have been worse had it not been for Skyscanner’s $192m Series C deal. The UK remains a hotspot for VC activity in Europe, however, accounting for 36% of overall funding in Europe; in Germany, funding for VC backed startups fell to $394m, a fourth straight quarterly drop, whilst the number of early stage deals increased for the fourth straight quarter, pointing to more backing for early stage companies doing seed or Series A rounds.

Asia declines worsen as “mega deals” disappear

In Asia, declines were more marked as VC deals dropped by 9% and volumes 34% quarter on quarter, a particularly concerning result given the significant declines from Q3 to Q4 2015.

Median late stage deal size decreased dramatically from $154m to just $62.5m in Q1 2016.

In China, volumes fell to $4bn, just over a third of what they were in Q3 2015, with just one $1bn + deal completed.

In India, activity slowed as deals fell by 4% and overall funding 24% to $1.2bn on 116 deals.

The signs all point towards enhanced due diligence as investors are becoming more wary of the hype surrounding startups

Unicorns asked to justify sky high valuations

Scepticism around high startup valuations was a significant factor in the global decline; only 5 new “unicorns” (companies with a $1bn+ valuation) were created during the quarter, half the number of any quarter in 2015. VC firms are pulling funding “mega-deals” to so-called Unicorns as they wait to see if their sky high valuations can be justified in the longer term, and whether companies can show compelling evidence of stabilisation and positive margins.

Internet and mobile dominates VC Investment

Internet and mobile technologies accounted for a staggering two-thirds of all venture capital backed deals globally; over the past 5 quarters, tech deals have accounted for 76% of all VC funding, with the next largest sector, Health, way back on just 13%. Investment into Cybersecurity fell to $764m from $1.1bn in Q42015, although the number of deals dropped by just 2, to 62. EdTech deal volumes fell dramatically to $287, from $1.1bn.

Corporate VCs on the rise

Perhaps the most significant upward trend in Q1 2016 was the amount of Corporate / Corporate Venture Capital activity, whose participation in deals rose 27%, a five-quarter high, as corporations increasingly try to bring R&D and the development of innovative / disruptive technologies in-house, taking advantage of lower valuations.

Conclusion; investors want more security as optimism over supercharged growth potential dissipates

“Investors require more information and want more protection”, say CB Insights / KPMG. Investor confidence has taken a hit, partly thanks to the underwhelming performance of VC backed company IPOs, who have struggled to match their private market valuations in the public domain.

Investors are increasingly questioning what they perceive to be, based on recent experience, over-optimistic valuations and revenue projections, that lack sophisticated underlying business plans to help realise their obvious potential.

The clearest example of this, says the report, is Spotify’s recent $1 billion raise, which was completed via a convertible debt structure that gave investors strict guarantees tied to forthcoming IPO performance.

Going forward we are likely to see a trend towards these kinds of funding deals, more due diligence, and more evidence of traction demanded, including the identification of clearly achievable milestones, such as customer retention, bookings and operating margin.

Says KPMG, later stage companies will need to focus on the fundamentals and expect increased levels of scrutiny, calls for stricter financial management and where necessary, redundancies.

“Companies will need to be able to explain to their stakeholders and employees what they are doing and why they are doing it. This is why some large companies are, in fact, decelerating their growth”, concludes the report.

The news from Q2 2016, in the light of the recent correction of Q4 2015, and a hint of recovery during Q1 216, will make for interesting reading.


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