Global venture capital funding moving from startups to scaleups

Venture capital markets boomed over the first half of the recent decade, with Angel / Seed investment climbing steadily between 2010 and 2015, as the number of investments almost tripled. However, from 2015 until the most recent quarter of 2018, deal volume tailed off, as investors grew wary of big promises, with scant financial fundamentals. One trend stands out: venture capital funding is moving from startups to scaleups, with some big-name unicorns continuing to see billion+ investments.

In 2017, a growing trend saw venture capitalists valuing quality over quantity. While fewer projects were recipients of venture capital injections, the value of funding hit a high of $155 billion. The trend is continuing into 2018, according to a new report from Big Four professional services firm KPMG.

In the latest edition of KPMG Enterprise’s Venture Pulse report, the firm continues to explore the most recent quarter of activity in the venture capital investment space – based on data from PitchBook. The analysis has revealed that investment into the segment has continued to run high, with total value for the first quarter of 2018 just shy of $50 billion, and the second highest level of investment since the second quarter of 2016. High levels of fundraising has given rise to stores of dry powder, and with pushes in the PE segment for return from investors, investment in the segment has remained strong.

However, venture capital investors are increasingly focused on last stage funding, which saw a slight increase in terms of volume in the latest quarter. Angel / Seed and early stage VC meanwhile, saw declines in volume – a trend affecting the market since the start of 2015.

The high value was the result of increases across the board for median investments by growth stage, although later stage companies saw the most significant increases, up from close to $5 million to $15 million each. Early stage VC meanwhile saw investment levels increase by $3 million to a median $7.7 million, while Angel / Seed investment levels saw a $300,000 apiece increase to a median $1.3 million.

Series D+ investments were particularly high with a median $50 million, while Series C saw median investments of around $31 million. The reasoning behind this, according to KPMG, is the maturity of later stage investing, with a clearer picture usually available regarding likely returns.

The study shows ‘unicorns’, or start-ups worth over $1 billion, continue to draw significant investment, at $15 billion of the total nearly $50 billion invested in the first quarter – across 35 investment deals, five of which were in excess of $1 billion. The US represented more than half of the unicorn investments in the latest quarter, although Europe and Asia too saw strong investment cycles – the UK and China, meanwhile, saw slower levels of investment in the top end of the market.

Regarding the direction of funds, software remains a clear winner in terms of investment volumes, at around 40% and up slightly on last year. While ‘other’ takes second spot with a little over 20% of total investment volume. Autotech, for instance, has seen significant increases as new technologies, such as BEVs and autonomous driving systems are developed at pace, various funds have been launched in the corporate venture capitalist space, including the Volvo Cars Tech Fund, while an alliance of automakers, including Nissan, Mitsubishi and Renault announced plans for a $1 billion fund, with around $200 million earmarked for the first year.

Software also dominates in terms of value of investments, followed by the ‘other’ category. Commercial property along with consumer goods and recreation have shown a somewhat slow start to 2018, with overall investment between them falling from around 15% to around 10%, perhaps reflecting a reluctance to invest in sectors which are being stung by the deflated spending power of consumers in major markets such as the US and UK.

“Venture capital investors continue to pour money into late-stage companies, in part because of the number of aging unicorns that have remained private,” said Brian Hughes, National Co-Lead Partner, for KPMG’s Venture Capital Practice. “With strong IPO exits by Dropbox and Zscaler this quarter, and an increase in the number of IPO filings, we could see the tide turning over the next few quarters, bringing with it a resurgence in early stage deals activity.”