Investors rate quality over quantity, study finds

25 July 2017 Consultancy.uk

The most recent survey of the venture capital industry has found that in line in the previous quarter, investment has continued to decline. Investors are increasing the median investments in all of the segments, from angel/seed to scaling, while exit activity has remained subdued, focusing largely on meeting the interest of strategic acquires.

KPMG’s latest ‘Venture Pulse Report', in association with research analysts Pitchbook, looks at major trends in the global and regional venture capital investment market. The Big Four consulting firm’s paper shows that venture activity has decreased over the past financial year. The research comes after it was revealed the FinTechs sector has also seen total investment coming their way from an array of sources decrease significantly, falling from $47 billion in 2015 to $25 billion last year.

Deal activity continued to edge downwards for the fifth straight quarter, and since Q1 2016 deal activity has fallen by more than 1,300, with the angel/seed segment the hardest hit. Deal activity in the segment has fallen by close to 1,000. Early stage VC has too continued to track down, although less steeply. Later stage VC investment remains relatively stable, although it too is down slightly on Q1 2016.

Global venture financing by stage

While deal activity trended downwards globally however, some regions have seen stabilisation, with the US noting a plateau in Angel/Seed investment at around 2,000 deals, while Later VC activity saw an upswing. Uncertainty remains in spite of this, with many investors focusing on their current portfolios over risking further investments. In Europe, meanwhile, all segments saw continued sharp falls as investors remain concerned around regional geopolitics, although regional governments are looking at ways to boost startup growth through support mechanisms – with the potential for a pickup in the market going into H2.

Remarking on the latest edition of KPMG's research into the market, Jonathan Lavender, KPMG International’s Global Chairman, said, "With two massive deals in China, significant mega-rounds in the Americas and Europe, and tie birth of numerous new unicorns – VC investment rebounded globally this quarter. While global deal volume may have declined, there are many positive signs that the VC market has reached a positive turning point."

Global median deal size

While volume has continued to decline, the research does identify a continued upwards trend in terms of median deal value. Seed investment stood at a median $1.4 million per deal in H1 2017, up from $1 million during 2016. Deal value for the segment has ticked up steadily since around 2014. Series A meanwhile has seen value rise more steeply, hitting $6 million in the latest half year, up from $5 million across 2016. Series B jumped from $7 million in 2013 to almost $13 million in the latest half-year period.

The standout performance in H1 2017 was Series D+ investment, which attracted an average $40 million, up from $30 million the year previous. The large boost was, however, the result of two mega-deal investments, which skewed wider investment statistics for H1 2017, for what would otherwise have been a relatively lacklustre H1 compared to previous years.

Exits and trajectory

Exits too have declined in recent years, although considerably more in the most recent quarters, with a fall from around 320 exits to around 270. The current glut in dry powered means that liquidity issues are unlikely to drive holders to exit portfolio companies prior to full maturity. Older portfolio stock may be sold as they further age, resulting in a potential increase in exits in the coming period.

Venture backed exit activity

Aside from a decrease in volume, value too has fluctuated, falling to around $15 billion, from just over $20 billion in the previous quarter.

Exits still tend to largely be to strategic buyers, with the interest of corporates more widely in innovation, among others, pushing them to pickup successful startups. In terms of a proportion of volume exited, strategic acquisition is growing at the cost of buyout and IPO – IPOs in particular have suffered in recent years as valuation expectations were out of sync with market outcomes on a number of occasions. In terms of value raised through exist, IPO created more value relative to the proportion of exits in the most recent half year, the exist pathway was also more lucrative than the previous year.

Exits by type

Commenting on the wider activity in the venture backed startup scene, Arik Speier, a Patner and Co-Leader of the KPMG Enterprise Innovative Startups Network, said, "The risk appetite of investors continues to be cautious as they focus on bets. Macro changes, such as a fluctuating currency level and the public stock markets, have created some instability and this continues to have on impact in the market.”

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