Venture capital funding hits $155 billion, but splits across fewer projects

06 February 2018 Consultancy.uk

Start-ups have received substantially more money from venture capital investors during the past year. In total, more than $150 billion went to start-ups – however, investors were increasingly choosy in selecting their targets, meaning a smaller group of projects actually received funding.

According to KPMG, a total of $155 billion was invested in start-ups throughout 2017, representing an increase of more than 10% from 2016, when investments amounted to $136 billion. Among start-up companies that managed to close major financing deals in the last quarter of 2017, there are five start-ups based in China. Didi Chuxing, one of the three largest Chinese 'ride hailing' companies (the world's best-known company in this field is Uber), raised $4 billion in a 'late stage' venture capital investment round, while e-commerce player Meituan-Dianping also received $4 billion for its Series C round. Another e-commerce company, Guazi.com, gained an injection of $580 million into a Series B round.

Investments in start-ups operating in the pharmaceutical and biotechnology sectors in particular rose considerably in value, reaching a total of $ 16 billion, almost $4 billion more than the previous year. The US was responsible for the vast majority of all investments in biotech, with the $1.2 billion Series B investment round for the US-based cancer screening company Grail making a big difference. Within Europe there were also a number of biotech-focused mega deals, such as those at Switzerland-based ADC Therapeutics ($200 million) and the German CureVac ($100 million), both of which took place in the fourth quarter of 2017.

Global venture financing by stage

While value has remained relatively stable over the past three years of analysis, KPMG’s researchers did find that volume in investments has decreased significantly. Angel/seed investment has been the hardest hit, with total investments dropping from around 10,000 to around 6,000. Series A funding too has decrease, in part due to lower numbers of Angel/seed investments in the pipeline. Series B-D+ volume has remained relatively stable over the past four years.

Remarking on the results for 2017, Arik Speier Co-Leader, KPMG Enterprise Innovative Start-ups Network, said, “Investors globally remain focused on late-stage companies with proven technologies and markets, paying relatively high prices to reduce their risk of failure. It became more challenging for early-stage companies to get the VC community’s attention and funding – a fact that will likely impact the pipeline down the road.”

Europe invests

In Europe, the total investment increased from $16 billion to over $19 billion, with a striking increase in interest from US investors for European start-ups. Investors from the United States accounted for 17% of investments in Europe in the past year, while in 2016 this was 13%. Despite economic insecurity still surrounding Brexit, investments in the UK reached record highs at the end of 2017, with seven deals each generating more than $100 million, including Collectoo, reaping $482 million, Truphone bringing in $336 million, TransferWise gaining $280 million, OakNorth at $203 million, The Ink Factory at $180 million, Orchard Therapeutics at $112 million and SecretEscapes at $109 million.

Venture financing in Germany

For those suggesting Brexit is not impacting the market at all, however, it is still worth noting, Germany is also taking an increasingly prominent role in this area in Europe, with Brexit threatening to dent any returns thanks to new trade tariffs, should the UK leave the customs union. The biggest German deal of 2017 saw biotech company CureVac able to raise $100 million.

Daniël Horn, founder of KPMG’s Innovative Start-up Group, commented on this trend,  "The increasing interest of the Americans can partly be attributed to the growing maturity of European technology companies. Despite the drop in the number of transactions in Europe, Germany is attracting more investments every year."

Corporate venture capital

Looking ahead, the researchers expect the investments to increase even further this year, with private investors expected to play a larger role. Corporates, which continue to be flush with cash, have continued to invest in start-ups and scale-ups, and the investment from corporates is now pushing 19% of total investment. Investment from corporates reflects their desire to be at the forefront of various innovations as well as companies being spun off from R&D arms at corporates, as ideas came together.

A trend that has been visible in the venture capital market in recent years is the so-called 'corporate venturing' – i.e. corporates investing in start-ups to either acquire a majority interest or to become the full 100% owner. During the past year, the share of venture capital activities involving corporate venture capital rose to a new record level, reaching a rate of 18.7% in the last quarter of 2017. The significant increase - which applies not only to the participation rates, but also to the related deal value - was largely caused by large multinationals that use their financial strength to pave the way for innovation and the talent required for this.

Corporate VC participation in global venture deals

Germany’s bolstered investment numbers are partially the result of this. In Europe – especially by the major German car manufacturers such as Audi, Porsche and Volkswagen – an increasing amount is being invested in start-ups to keep up with the changes in the automotive sector. According to Horn, "The trend is also for investors to invest larger amounts in a limited number of high-quality companies instead of investing in a large number of companies. By shifting attention in this way, investors are not only able to reduce the risks in their investment portfolio, but also to reduce the high transaction costs that the many deals entail.”

Brian Hughes, National Co-Lead Partner for KPMG’s Venture Capital Practice, also commented, “Global venture capital investment surged, powered by mega funding rounds in Asia and new quarterly investment highs in the US and Europe. Investors continued to plough [sic] money into late stage rounds as part of a broader trend for the year that saw 70% of VC investment concentrated in rounds of $25 million or more. Looking ahead to 2018, we expect investors to continue to focus on late stage deals with proven business models and a path to profitability.”

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Consumer goods start-ups grow interest from venture capital

23 April 2019 Consultancy.uk

Funding the latest consumer goods start-up has been a real money-spinner for venture capitalist firms, with a number of $1 billion companies – or unicorns – having emerged in the space in recent years. New analysis has explored the resulting corporate consumer products activity in the acquisitions space.

Consumer products have enjoyed years of strong growth as new markets opened in developing Asia. China in particular has enjoyed strong growth across a range of consumer good types as the country’s middle class expanded. Private equity firms have been keen to pick up targets in the space as they expand their portfolios to include additional local capacity as well as customers in new markets.

As a result, a study from Bain & Company has found that interest from PE firms in the consumer product space grew sharply in 2018, hitting 6.1% of all invested capital for the year, and making it the third most sought-after category. It is now only behind financial services (23.9%) and advanced manufacturing and services (13.9%).

Corporate venture capital investment

The ‘M&A in Disruption: 2018 in Review’ research found that growth in the segment reflects key changes in the segment as a whole. This is particularly true of insurgent brands, which often leverage local expertise in order to take on international giants in domestic markets.

Short change

The market changes have led to shifts in motivations for consumer goods company investments from PE firms. The number of strategic investments stood at 50% in 2015 compared to deals that increased scope. This has shifted significantly, with 34% of deals focused on strategic outcomes in 2018 compared to 66% for scope. The move towards scope reflects companies seeking out fast-growing products that enable stronger revenue growth streams.

Acceleration in scope-oriented M&A in consumer products

However, there were other motivations for deal activity in the space. Activist investors have put pressure on companies to expand their portfolios in recent years, with the trend expanding from just US targets to Europe.

Further trends

The other key shift in the space regards outbound deal activity. The study found that outbound deal activity has increased significantly in the Americas (up 363%) with total deal volume up only slightly (15%). Key deals included Coca-Cola and Costa, Procter & Gamble and Merck’s consumer health unit, and PepsiCo and SodaStream. In the Asia-Pacific region, outbound deal activity rose 195% while total deal activity fell sharply, by -36%. The EMEA region saw both a sharp decline in outbound deal activity, at -68%, as well as lower overall deal activity, which fell by 32%.

Cross-regional deal making

Deal-making in the current environment is increasingly fraught with uncertainties, as business models change on the back of new technologies, new consumer sentiments and wider market changes from new entrants. As such, acquisitions are increasingly useful as possible hedges on changes in market direction. As such, companies are increasingly pressed to take a future-back position, making sure to incorporate a vision of how the company needs to look in five years into acquisition strategy.

The firm notes that certain acquisitions which enhance a remembrance of a nobler mission, revive a sense of entrepreneurialism and engage directly with consumers may be necessary qualities in acquisitions that transform a company to fit market expectations in the coming decade. While going forward, focus on innovation, partnering with retail winners, reducing cost base and constantly reallocating scare resources will be necessary to protect market share in areas where insurgent local and strategic competitors are active.

Related: Private equity asset growth top priority for 2018.