Unicorn births and US$100 million+ financings slump as deal activity declines across all markets. Asia funding and deals hit hard. KPMG and CB Insights’ Q1 2016 VC report highlights continued uncertainty in private markets with a second-straight quarter of VC funding and deal declines globally.
Skepticism of sky-high startup valuations, a non-existent IPO market, continued public market uncertainty and larger macro-economic concerns resulted in a continued slowdown for investment and deals into venture capital (VC)-backed companies. According to Venture Pulse, the quarterly global report on VC trends published jointly by KPMG International and CB Insights, Q1 2016 saw US$25.5 billion invested across 1,829 deals, marking the second-straight quarter in which investors dialed back VC funding and activity.
This result shows that the slowdown in Q4 2015 – which capped what was otherwise a record year for VC investment – was no blip. According to the new Q1 2016 report, the continued pullback saw deal volume decline across all major markets.
In Asia, where funding fell 34 percent in the quarter, was the main driver of the global funding decline. Europe and North America both saw funding climb, if only minimally.
“We feel there is a considerable amount of dry powder in the market,” said Brian Hughes National Co-Lead Partner, KPMG Venture Capital Practice and a partner for KPMG in the US. “However, overall concerns around the global economy and a decline in valuations in most parts of the world are leading investors to be far more selective than in the past. VC Investors are increasingly rolling up their sleeves and looking for performance rather than possibility.”
Key Q1 highlights:
In addition to key findings for Q1 2016, the Venture Pulse quarterly report series examines the state of venture capital investment globally and regionally, including key trends and analyses.
Anand Sanwal, CEO of CB Insights, commented: “This is the new reality. It’s harder to get financed at all stages, harder to raise massive rounds of financing and harder to get the much coveted unicorn valuation. Versus years past, it’s worth noting that the level of funding in Q1 2016 is still quite healthy. But we’re now at a point where startups and investors who got drunk on easy money and big valuations are now sobering up.”
$100 million+ financings down significantly from mid-2015 peak
Large mega-round deals (those over $100 million) continued to slip, with 37 in Q1 2016 compared to 40 in Q4 2015 and a peak of 71 in Q3 2015.
North American companies, primarily out of Silicon Valley, along with Asian companies were the main recipients of these large financings. In Q1 2016, North America saw 18 mega-deals, while there were 16 in Asia. Comparatively, Europe only had three mega-rounds.
North America and Europe see funding climb but deals slip; Asia sees a sharp pullback in both funding and deals
Regionally, North America continues to lead global venture capital activity. With $15.2 billion invested in the first three months of the year, the region eclipsed Q4 2015, which saw $14.3 billion of funding.
Despite the growth in funding in North America, deal activity dropped and hit levels last seen in Q1 2012. The decline in activity was driven by a continued shift away from seed deals. In the recent quarter, the percentage of seed deals fell to 24 percent, a five-quarter low.
Among the major markets for venture capital investment, Asia saw the only drop in both total funding and deals. In Q4 2015, Asia saw $9.8 billion invested into VC-backed companies. In the first three months of 2016, this number dropped to $6.5 billion – representing a 34 percent plunge. Asia’s mega-deal count, however stayed steady at 16, the same number as in Q4 2015. That’s a big drop from the 28 mega-deals the region saw in Q3 2015, however. Asia deals also declined, from 394 deals in Q4 2015 to 358 deals in Q1 2016. On a year-over-year basis, deal volume was virtually flat next to the 355 deals in Q1 2015.
Europe saw $3.5 billion in financing across 338 deals, compared to Q4 2015’s $3.2 billion across 370 deals. Among the major markets, Europe had the highest share of deals at the seed stage – 35 percent of all deals – which may suggest good things for the market as these companies mature, although seed deal volume dropped dramatically. The two largest markets within Europe – the UK and Germany – saw funding declines.
“VC investors are becoming more cautious and more skeptical,” says Arik Speier, Head of Technology, KPMG Somekh Chaikin in Israel. “In order for companies to attract funding – especially at the seed stage – they will need to have a stronger business plan, positive margins and a way to prove the validity of any bullish projections.”
New unicorns birthed at slower pace
Representing the third-straight quarterly slowdown in unicorn creation, Q1 2016 saw one-fifth the number of unicorns born in Q2 2015. 3 new unicorns were born in Asia, 1 in North America and 1 in Europe. Among the quarter’s new unicorns were Skyscanner, Mercari and Shopclues. Mercari is notable as it is Japan’s first unicorn.
Corporate investing continues to be strong
Robust corporate investment into VC-backed companies continued in Q1, with corporate VC participation climbing to 27 percent, a 5-quarter high. Asia saw the heaviest involvement from corporations – with 32 percent of deals there involving corporations or corporate venture capital groups. While also significant, North America and Europe had less corporate VC involvement by comparison – at 26 percent and 23 percent, respectively.
CB Insights’ Sanwal commented: “Corporations continue to look to access innovation by engaging in corporate venture investments. A flood of new corporate VCs and existing corporate VCs becoming more active, coupled with large corporate balance sheets, suggests that the influence of corporate venture arms will grow over time.”
*Note: All figures cited are in USD.
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