Venture capital investment remains cautious across the globe, with political and economic uncertainties – including Brexit and possible rate rises – as well as valuation concerns, continuing to affecting investor confidence. New research finds that while deal volume has hit lows last seen in 2013, deal value remains relatively robust due to large hauls from unicorns. Two major areas of concern to many businesses, cyber security and AI, continue to draw funding support.
KPMG's latest study on the Venture Capital (VC) investment market, conducted in association with CB Insights, provides insight into key market trends and main developments at VC firms and the VC arms of corporates.
VC backing out
Q2 2016 reports a mixed bag result on the previous quarter. Deal volume is down, from 2,008 deals to 1,886 deals, while deal value has increased from $26.5 billion to $27.4 billion. Both results remain far below that of Q2 2015, when deal activity reached its most recent peak at 2,319, while deal value stood at $34.7 billion.
According to the firm’s analysis, the increase in deal value is largely due to a number of $1 billion+ funding rounds by ‘deca-unicorns’, those valued at more than $10 billion. Deal volume has been impacted, according to the firm’s analysis, by a range of factors – from Brexit, the impending US Presidential elections and macroeconomic conditions, to continued concerns about valuation.
The firm suggests uncertainty, particularly around valuation, is seeing VC players take up a ‘wait-and-see’ holding position, whereby they continue to raise capital as well as evaluate their current stock. Investors have also become more cautious about late stage funding, following a number of lacklustre IPOs that failed to meet their private valuations. Caution has also seen a reduction in the number of newly minted unicorns, just seven in Q2 2016, with considerable concern that the tough market conditions may see the magic wear off, resulting in a number of ‘unicorn corpses’.
The research does find that VC investors have increased their backing of startups, whose deal share returned to levels last seen in the frenzied Q3 2015. Series A saw a slight loss of funding share, down 3% from the previous quarter but in line with activity in Q3 2015. The ‘other’ category remains at a relative high, coming in at 17% of total backing.
According to the firm’s analysis, those companies that are attracting VC backing tend to be well organised, with strong profitability profiles and cost controls in place. In North America and Asia, mainly proven companies were able to garner VC attention, while in Europe – in which strong organisation has been the norm for some time – it was predominantly seed funding being handed out.
In terms of VC deals by continent, North America is still well out ahead. The US and Canada saw a total of 1,117 deals, down slightly on 1215 deals the previous quarter. In Europe the number of deals were up slightly on the previous quarter, increasing from 365 to 385, while Asian deal volumes saw a slight decrease, falling from 389 to 343. Deal value was up particularly sharply in the US, from $15.5 billion to $17.1 billion – mainly on the back of large funding rounds by unicorns. Deal value in Asia remained stable, while deal value in Europe dropped by around $700 million to $2.8 billion.
The research also considers the VC backed deals in a number of ‘hot’ areas of investment. One such area is cyber security. Globally the ‘informal’ cyber criminal economy stands at around $400 billion per year according to McAfee, while up to 500,000 cyber criminal events per day are said to occur. Increased digitalisation, increasing value for personal information and the ever increasing number of interfaces through which to penetrate systems – from staff to IoT – means that few systems are secure. Securing systems, if this is possible, has become a large industry, which is continuing to draw demand for expertise and innovative solutions.
VC backing for the industry has, even in the face of the increasing threat, stayed relatively stable. In Q2 2016 there were 68 investments, worth around $811 million. These numbers are down slightly in terms of volume relative to Q2 2015 when there were 70 deals, while in terms of value the latest quarter was up ever so slightly. The US was by far the most active region with a total of almost $700 million in deals.
Another area garnering significant attention from investors is the Artificial Intelligence technology segment. The technology promises to create a range of automation solutions for companies in a range of sectors, many of which are no longer confined to simple processes but also factor in a range of possible contingencies that require some form of understanding of the sometimes irrational actions of other entities within an environment. Particularly in areas such as business process outsourcing, technologies are proving themselves as a way of reducing headcount while boosting key business performance metrics.
The segment has shown relatively strong resilience over the recent period of funding instability. Deal volumes stood at 73 in the previous quarter, from heights of 81 in Q3 2015, deal value however has decreased somewhat, falling from $858 million to $624 million. The analysts suggest that the promise of the technology will continue to garner increased investor interest in at least the short-term. Mid-term risks are likely to include government regulatory attention.
Cliff Justice, Principal of Innovation & Enterprise Solutions at KPMG, says, "From automating simple tasks to augmenting complex decisions, there are very few areas of business that Al and cognitive computing will not impact. KPMG is currently piloting cognitive technology to help augment our services which underscores our commitment to reinforcing confidence in the capital markets."