Worldwide venture capital funding has reached a record high of $128 billion in 2015, buoyed by massive venture capital investments during Q2 and Q3 in particular. Despite the highs in funding, the number of deals actually fell 3% versus 2014. Looking ahead, the market is set to continue its growth trajectory, however, at the same time market realities are forecasted to sink in.
Venture Capital backing is a key funding source for a range of startups seeking to become the next unicorn with their innovative offering. For venture capitalists, the sometimes high risk ventures provide a means to book serious returns on their capital investment. In recent years the startup environment has been heating up as a range of technologies come of age, including trends such as big data, internet of things, analytics and robotisation. However, the chances of becoming the next unicorn remain relatively slim.
In a recent report, KPMG provides a global analysis of the venture capital market, as well as comparisons to earlier periods. The research looks at equity funding that enters emerging companies from venture capital firms, corporate venture group or super angel investors. The study is based on verified funding from a range of federal and state regulatory filings; by direct confirmation with firms or investors; or from press releases.
The level of funding hit record highs last year with 7,872 deals with a total value of $128.5 billion, up 44% on the year previous. The number of deals by volume dropped by 3% on the year previous, when 8,089 deals valued at $89.4 billion were noted. Deal volume had been tracking upwards since 2011 when there were 5,534 deals, while deal value has almost tripled since 2012. The high total value in 2015 stemmed from growth in the number of mega deals – overall, 2015 saw over 100 mega-rounds, which raised a cumulative $27.3 billion.
“2015 was a record-setting year for VC investment, driven by an incredibly positive first three quarters. Following a pullback in the last quarter, we expect investors will be looking for companies that have their operations under control, reasonable burn rates, and strong plans for early stage profitability,” remarks Brian Hughes, Partner at KPMG in the US.
The quarterly breakdown highlights the significant dip seen in the final quarter of last year, when deal value dropped from $38.7 billion in Q3 to $27.2 billion in Q4; deal volume too saw a large drop from Q3’s 2,008 deals to 1,742 deals. The last time such a low number of deals was seen was in Q1 2013, although deal value is still significantly higher than the $11.5 billion recorded in that quarter.
A number of reasons have been cited by the researchers for the decrease in deal activity. Interest rate rises in the US is prompting capital to seek lower risk portfolios, while confidence in the valuation of investments has also sparked changes in investor behaviour. The recent turmoil in the Chinese market has further resulted in a dampening of activity. Hughes explains: “Up until the third quarter of 2015, we saw as much capital going into companies that were generating negative cash flows as those that were generating positive ones. Now, there’s been a divergence. In 2016, the fundamentals are really going to start to matter again. Startups that may be operating with negative gross margins, excessive burn rates and inflated valuations will be the most impacted.”
In terms of region, North America leads the pack in both volume as well as value, with Europe and Asia relative close in terms of deal volume. The analysis shows however that it is particularly North America that is losing traction in terms of deal volume, down from above 1,300 deals in Q4 2014, and Q1 & Q2 2015 to 1,026 deals in Q4 2015. Deal numbers in Asia and Europe have remained stable across the previous five quarters.
In terms of value, more than $6 billion in deal value has been lost in North America, from a high of $20.8 billion in Q3 2015 to $14.1 billion in Q4 2015. Deal value too decreased in China by $4.5 billion between the same quarters. In Europe deal value has remained stable at around $3 billion across the previous four quarters.
Seed and angel investors have, as a proportion of all deal activity, lost some terrain, suggesting that venture capital is becoming more cautious about their investment in ideas. Series A has seen its level of investment increase to levels last seen in Q4 2014 at 26% of the total, suggesting that funds are now being channelled into bolstering startups that are already off the ground. Series B investment has been trending upwards in recent quarters, now taking 16% of the pie, up from 13% in Q1. Across the further funding stages not a great deal of change has occurred in the past five quarters.
In terms of the sectors that are pulling in venture capital, the internet remains the going concern, increasing its share of the total funding from 46% in Q4 2014 to 50% in Q4 2015. Companies in the mobile and telecommunications space have seen their share of the total pie of funding decrease by 4%, from 20% in Q4 2014 to 16% in Q4 2015. The other sectors have remained relatively stable over the past five quarters.