Venture capital investments have continued to tick down in value, a new analysis finds. Global political uncertainties, including the US Presidential election and Brexit, as well as economic conditions, from expected rates hikes in the US and slowing BRICs economies, have dampened investors’ keenness on what are increasingly seen as risky investments. Investment activity may be revitalised once global uncertainties resolve and more certainty around valuations are achieved.
Accounting and consulting firm KPMG and market research analyst CB Insights recently released the latest edition of their ‘Venture Capital Pulse’ series, a report which explores the global Venture Capital (VC) investment market. The research opens up key insights into market trends and major developments at VC firms and the VC arms of corporates.
Venture Capital market trends
The VC market has, in recent years, seen a considerable uptick in investment flows. Starting around the first quarter of 2014, VC investors began funnelling considerable funds into companies across the globe, with the peak of the market’s growth trajectory so far, hit in Q3 of 2015, at $39.6 billion across 2,366 companies. 2015 ended with a record investment flow of $128 billion.
Rationalisation of the market fundamentals began to affect VC decision making in Q4 of 2015, with considerable concern surfacing that valuations were out of sync with reality. In the period since, VC investment has slowed somewhat, although total investments and deal counts remain considerably higher than during the 2011 – 2013 period.
The latest quarter continues to show investor caution, in the face of a number of global uncertainties – from the US Presidential election and the fallout from the UK’s EU referendum decision, to wider geopolitical concerns and slowing BRICs economies. Overvaluation, the firm notes, too remains a concern at the forefront of investors’ minds, affecting investment decisions.
In terms of regional activity, North America continues to suffer from fleeting VC investor confidence. The region saw deal count fall from 1165 in the previous quarter to 1127 in the most recent quarter. Deal value fell considerably on the previous quarters’ results, from $17.6 billion to $14.4 billion. Investors, particularly in the US, remain spooked by valuations of companies not lining up with their exit potential, as well as wider concerns about the US Presidential election fallout. The previous quarters large investments in ‘deca’ unicorns was not repeated in the most recent quarter, resulting in a considerable drop in deal value.
Europe, while seeing deal value drop, has continued to see deal volume increase. The region remains more stable in terms of valuations than the US, with investors already keeping an eye on key measures. The Asian market has decreased in deal volume and deal value, falling to 323 deals and $7.2 billion respectively, from 339 and $7.4 billion respectively the previous quarter.
Corporate venturing rises
The results find that there is a growing trend of activity from corporate and VC deal participants in the wider VC market, as companies seek to grow inorganically in areas of innovation through funding startups and other target organisations. Since Q3 2015, activity from corporates VC investment in terms of total VC transactions has increased from 24% to 28%.
Jan Reinmueller Head of Digital Village, KPMG in Singapore, explains, “Corporate VC investment continues to rise as traditional companies realize the value that investing in startups can provide. The return for corporates can be significant - if the transformation of their organizations is managed strategically - from more agile innovation and creative solutions to access to stronger data analytics and new sales channels. Corporate VC ROI can go well beyond financial results.”
The UK shows a mixed bag of investment results. The country has, in opposition to European trends, seen a decline in deal activity in the past two quarters from heights in Q4 of 2015, falling from 131 deals to 110 deals in the most recent quarter. Deal value too has seen a considerable decline, from almost $1.5 billion in Q4 2015 to around $830 million in the most recent quarter.
The firm’s analysis places considerable blame on the Brexit result for the lacklustre previous two quarters, although the slight uptick in the latest quarter reflects that serious concerns have not materialised and activity is again picking up steam. Uncertainty remains however, with the full effects still to come, Anna Scally Partner, Head of Technology, Media and Telecommunications at KPMG in Ireland, explains, “The long-term ramifications of Brexit haven’t been felt yet. Deals are still getting done, but many of these would have been in the pipeline before the referendum. The real impact will likely be felt heading into 2017, as the UK begins proceedings to disentangle itself from the European Union.”
The cull of unicorns
The research too finds that unicorn production has continued to be lacklustre, with Europe generating no unicorns over the past quarter (Europe has around 50 unicorns), while Asia and the US managing four apiece. In addition, a number of former unicorns have not been generating the returns expected on exit; investors therefore continue to take a more cautious approach.
The report notes, “Rather than fighting to attain unicorn status quickly when they might not be ready for it, companies are instead getting more realistic valuations that reflect their current value. This means that companies that do achieve unicorn status should be in a better position to keep that status and to achieve strong results upon exit. On the investment side, with the glamour to find the next unicorn decreasing, investors are becoming more tactical with their investments.”