VC funding into European startup’s has fallen by one third in Q2 2016, according to data from Pitchbook; the total amount raised, which stood at $4.3bn in Q2 2015, then experienced a marked dip in Q4 2015, before a slight gain in Q1 2016 brought levels back to $3.5bn, has now dropped again to just $2.8bn in the three months to the end of June, the data reveals.
But surely this isn’t all the fault of Brexit uncertainty? Ahem; during the same period, VCs invested more than $40bn globally, a 20% increase over the same period last year, which at the very least shatters the myth that the tech boom is coming to end amidst inflated valuations and a lack of profits, successful exits and IPOs?
Well, not quite; last quarter’s figures have been skewed somewhat by the enormous rounds raised by Uber, who bagged $3.5bn from the Saudi Arabian Sovereign Wealth Fund, and Didi Chuxing’s $4.5bn raise, backed by the likes of Apple. Ride sharing, it seems, is currently making the difference when it comes to the global tech startup scene.
And here’s another surprising insight; the UK more than retained its usual roughly one third share of all investment into Europe; having won approximately $1.3bn across 105 deals in Q1 2016, it pulled in $994m last quarter, a comparatively smaller drop than across the rest of Europe.
Granted, however, this may well have been because nobody truly thought a Brexit vote could actually happen.
But still, rumours that startups, from humble seed-funded inhabitants of co-working spaces, to giants like Google and Amazon, are about to up sticks and head for Paris and Berlin are currently just that – rumours. Let’s wait and see what kind of deal is on the table first, shall we?
Another worrying trend is the fall in the number of deals overall, which decreased by a whopping 47% across all regions globally. This means bigger funding rounds; the total invested into angel or seed rounds worldwide fell by half, from $4bn to $2bn, although it did increase in Europe, from $351m to $398m.
Funding for later stage rounds in Europe fell off a cliff, from $2.8bn in Q2 2015 to just $1.2bn this quarter just gone, but increased in other regions.
In the US, funding remained steady at $21bn, but early stage and seed rounds experienced a correction; typical amounts invested into early stage companies are returning to around $1m-$2m, having swelled to typically $5m across previous quarters. The risk appetite for these kinds of ventures, it seems, is not as strong as it once was, even for the Valley’s eternal tech optimists.
What the data is really telling us – don’t pay too much attention to the data
Tracking flows of VC investment can be a useful exercise, and indeed a lucrative one; a spate of companies are doing it, from Pitchbook, to CB Insights, to GP Bullhound, CrunchBase, Beauhurst and Tech.eu, who disseminate morsels of intriguing facts and figures which are used to lure analysts in, who are then offered the “full report” for a reasonably hefty sum.
Reports are released when there is enough extra data to sell in a detailed report, or partnerships with corporate consultants like KPMG are secured for purposes of publicity, but there must be a question mark over how much value there is in comparing different quarters and trying to identify global trends.
VC flows may be cyclical, but not on a quarter by quarter basis. They are not like retail equity funds, for example, where fund managers must hit quarterly or even monthly targets, resulting in sell-offs or panic buys.
Yes, the data looks great in a press release; “America’s VC investment holds steady, no crisis!” or “Europe in trouble as VCs pull out of the region!” and it is certainly useful to get a feel for what the figures are, not least so the global significance of the industry can be determined against others.
Apple’s revenues were $50.6bn in Q2 2015, for example; more than double global VC spending over the same period; and it has something like 10x that figure sitting in the bank waiting to be deployed.
There are so many mitigating circumstances that it would be dangerous to draw too many conclusions or rely too heavily on funding data as part of a sophisticated investing strategy; even with a global shock as cataclysmic as Brexit, there are really no guarantees how investors will react, and so much of VC activity is not systemic, but on a case by case basis.
Nobody has a schedule for when the next Facebook or Google will be formed, at least nobody we know of. If there’s one thing Brexit has taught us, it’s that things can change, or not change as expected, very quickly.
Within Europe, there are plenty of reasons to be hopeful, if not cheerful. Partech Ventures has just announced it has raised €400m for a new fund to invest into European startups – originally the intention was to raise €300m but demand from LPs and startups was so strong the figure was revised upwards.
It is worth bearing in mind that the venture capital and startup ecosystem operates on many different levels, and scales. There are seed investors, early stage, Series A, then the serious money through Series B-F, then the mega rounds of billions, and finally the IPOs.
The mega rounds can’t happen without the early stage network, just like the shark can’t survive without its’ school of pilot fish.
Remember, size isn’t everything – it’s the determination to learn, to educate and to grow businesses, whatever size and stage they may be at, that really counts. That what leads to the data-skewing mega rounds, and the political shenanigans, and is what keeps everybody on their toes.
A high school dropout with big ideas, a voter exercising their right to go against the grain – can change everything.