Worldwide venture capital funding jumps to 128 billion

08 February 2016

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.

Global trends
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.”

Continental drift
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.

Staged investment
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.

Sector support
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.


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Consumer goods start-ups grow interest from venture capital

23 April 2019

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.