Venture capital investment continues to fall, KPMG finds

05 June 2017 Consultancy.uk

According to a new study by KPMG, venture capital (VC) markets have continued to decrease investment into Angel/Seed and Early stage startups, in the face of market uncertainty and focus on the management of current stock. Overall however, investment hit $27 billion in the first quarter of this year, up from $23.8 billion in the previous quarter, but down from close to $35 billion in the first quarter of 2016. Exits too continue to trend down, with strategic buyers the key exit form – even while the IPO of Snap generated considerable proceeds for the segment.

Big Four consulting group KPMG’s latest ‘Venture Pulse Report', covers a variety of insight into global venture capital activity in the first quarter of 2017. The survey, carried out by Pitchbook, shows a continued slowdown in terms of closed deal volume, which fell from 3,200 in Q1 2016 to 2,700 in Q1 of 2017, even while deal value picked up slightly on the previous quarter, up from around $23 billion to around $27 billion.

The most note-worthy finding in the document however is the continued decline of Angle/Seed round investments volume, which fell to the lowest levels seen since 2012. Early stage VC too saw decline in investment volume, although not as steeply. Later stage VC saw a slight increase in volume.

Global median deal size

The slow-down in Angel/Seed and Early VC rounds reflects continued investor uncertainty in the market, with many pursuing growth in their current portfolios, at the late-stage. Various concerns continue to affect confidence, according to researchers, ranging from Brexit and the triggering of Article 50, the slowdown in the Chinese economy, the on-going political crisis surrounding the new White House administration’s key policy initiatives.

While volume of such investment have continued to decline however, the research paints a more optimistic picture regarding invested value, which saw a general bounce compared to previous quarters. Current trends show a considerable increase in median deal values at the Angel/Seed stage of $1 million, up from $0.8 million in 2016 and $0.6 million in 2015. Within the paper, the Early stage of data sees the biggest jump in median deal size, increasing from $4 million last year to $5.2 million so far this year. Later stage values that followed remained constant over the past three years at $10 million.

Global share by series, volume and value

The research finds that the share of closed deals has increasingly favoured the top end of the closed deal spectrum. Series D+ saw significant growth relative to the previous years’ aggregate, while Series C and Series B too saw relatively significant levels of volume growth. The largest loss n volume resulted from a decline in Angel/Seed funding in the first quarter of this year.

Value too saw a cut for the Angel/Seed rounds, falling further as a share of total value. Series A, meanwhile, saw its share of total value increase on 2016, while Series B lost value share. Series C remains relatively stable, while Series D+ increased slightly in invested value as a share of total value.

Global venture-based exit activity

Exiting investments

The research points to a continued decrease in venture-backed exit activity, with the number falling to around 280 exits in the most recent quarter. While volume has fallen, deal value has picked up slightly on the previous quarter. Despite this, exit activity has fallen considerably relative to Q4 of 2014 when value was at its all-time high and volume almost reached the zenith of the most recent peak. The overall downwards trend means that investors will, according to the research, need to assess exit trends carefully.

Exit types, volume and value

In terms of exit activity, buyouts have increased slightly on previous years, while Initial Public Offerings have suffered significantly. The decrease in IPOs reflects continued uncertainty, particularly in Europe, as well as concern around valuations amid continued economic and social upheaval in the region. Strategic acquisition remains the main vehicle for exiting stock, even while the number of such deals has decreased markedly on the year previous.

While IPO volume has decreased, a number of mega IPOs, including that of Snap, has boosted the proceeds for the form of exit in Q1 of this year. Buyouts however, remain relatively flat in terms of value, while strategic exits continue to represent the lion’s share of exit proceeds.

Commenting on the future of VC funding, Jonathan Lavender Principal, KPMG’s Head of Markets in Israel, said, “Despite declines in seed deals, the market is still open to the right startups. In the current climate, companies need more than a good idea. They must show solid technologies, experience, and a demonstrated market opportunity. Serial entrepreneurs in hot sectors like artificial intelligence or robotics have a clear advantage.”

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