Overall venture capital (VC) investment held steady in the second quarter of 2019, reaching USD$52.7 billion* globally, according to the Q2’19 edition of the KPMG Enterprise Venture Pulse report. US and European investment remained relatively robust, however, investment in Asia was weak for the second consecutive quarter, reaching only $10.1 billion as Chinese mega deals continued a pause in activity.

Globally, VC deal volume declined for the fifth consecutive quarter, reaching only 3,855 deals, as high valuations and fierce competition – particularly at the seed stage − combined to produce an evening in the pace of deal-making.  The drop in deal volume was particularly pronounced in Europe in Q2’19, reaching the lowest levels in the past decade, as early stage companies struggled to attract VC attention.

“Overall VC activity globally remained steady during the second quarter of 2019.  However, on a regional basis, results were more mixed, with the US, Americas and Europe drawing significant totals but a continued pullback in Asia,” said Kevin Smith, Co-Leader, KPMG Enterprise Emerging Giants Network and a partner with KPMG Enterprise in the UK.  “Megadeals, the hallmark of Asia in 2018, were much more prevalent in Europe this quarter, with 10 deals over or at $170 million.”   

Key Q2’19 global highlights

-        Global VC investment dropped from $56.2 billion in Q1’19 to $52.7 billion in Q2’19.  The largest deals for the quarter included a $1.1 billion investment in India-based OYO Rooms and a $1 billion investment in Columbia-based Rappi.

-        Valuations continued to rise across all stages of investment in the first half of 2019 with global median pre-money valuations for series D+ increasing from $350 million in 2018 to $477.5 million in 2019 (YTD).

-        The top four financings for the quarter came from four different countries and included a $1.1 billion investment in OYO Rooms (India), $1 billion to Rappi (Colombia), $1 billion to JD Health (China), and a $1 billion investment in Flexport (US). 

-        Investment remained strong in the US, reaching $31.5 billion on 2,379 deals. US exits spiked as a result of mammoth IPO debuts by the likes of Uber, Lyft, Zoom, Beyond Meat and more.

-        VC investment in Asia remained subdued for the second consecutive quarter with only $10.1 billion invested across 484 deals as corporate investors took a pause and megadeal activity ($100 million plus) remained stagnant.  

-        In spite of a softening pace of venture deals, VC continued to pour into Europe – reaching $8.4 billion in Q2, surpassing the previous record of $8.5 billion set in the first quarter of 2019.  There were 10 deals over or at $170 million in value, led by top deals Deliveroo ($575 million), AUTO1 Group ($535.9 million) and GetYourGuide ($484 million).

US remains strong in 2019

VC investment in the US remained robust during Q2’19, reaching $31.5 billion, compared to $34.4 billion in Q1’19, the result of a strong economy, solid performance of the public markets, and expectations of lower interest rates.

During the quarter, investors diversified their investments across a broad range of industries including logistics, food delivery, aerospace, consumer durables and technology.  Meat alternatives, artificial intelligence and autonomous vehicles also gained interest from investors.

The largest deals for the quarter included Flexport ($1 billion) and DoorDash ($600 million) from San Francisco, followed by New York-based automation firm UiPath that raised $568 million.

23 new unicorns

During Q2’19, the US saw 23 new unicorns created across fintech (e.g. StockX, iValua, Marqeta, Carta, Bill.com), data management (e.g. Sumo Logic, Druva), cleantech (e.g. Sila Nanotechnologies), edtech (e.g. Coursera), cybersecurity (e.g. KnowBe4), and others.

Meat alternatives attract investors

During the quarter, Impossible Foods also raised a $300 million funding round. This, and the success of Beyond Meat’s IPO highlights the growing investor interest in meat alternatives that align with the social consciousness of the millennial and post millennial generations.

Europe reaches new record for deal value – as volume falls

In Europe, VC investment reached record levels this quarter, demonstrating continued resilience in the face of ongoing geopolitical uncertainty and associated challenges with Brexit.  Overall amount of venture capital investment reached $8.74 billion during Q2’19. However, deal volume continued to fall – from 958 in Q1 to only 825 this quarter.

The strength of Europe’s VC market continued to be defined by the growing diversity of its innovation hubs. While VC investment in the UK was well-off of historical highs, increasing investment in the Nordic countries, France, Spain, Poland and others combined with steady investment in more established innovation centers in Germany and Israel helped keep VC investment in the region high during Q2’19. 

Europe’s top 10 deals

The top 10 deals came from six different countries including three from Germany (Auto1: $535.9 million, GetYourGuide: $484 million, Adjust: $227 million), 2 from the UK (Deliveroo: $575 million, Checkout.com: $230 million), and 2 from Israel (Gett: $200 million and Innoviz: $170 million).  Other countries represented in the top 10 included Switzerland, France and Spain. 

The top 10 deals accounted for over $3 billion of Europe’s $8.74 billion total investment, reflecting the concentration of investment on the largest of deals. 

Asia VC investment subdued as mega-deals pause

VC investment in Asia remained slow for the second consecutive quarter – reaching just $9.6 billion on 468 deals. The continued slowdown in deal making in China is likely reflecting the ongoing US-China trade dispute and a corresponding increase in investors’ caution.

A shortage of megadeals contributed to the decline in VC in Asia. At the end of Q2’19, the largest 10 deals in Asia accounted for $4.6 billion in investment. By comparison, in Q4’18, the 10 largest deals accounted for $11 billion.  This likely contributed to the shrinking number of unicorn births in China; in Q2’19; there were no new unicorns birthed in China – compared to 23 in the US.

However, some bright spots remained. Gurgaon-based OYO Rooms raised $1.1 billion and JD Health (Beijing) raised $1 billion this quarter – in a testament to the massive potential for healthcare solutions.  The top five deals were rounded out by Beijing-based Aihuishou which raised $500 million and Hozon which raised $437.7 million. 

Corporate players remain essential in the capital cycle of Asia’s Venture ecosystem, in particular at later stages.  However, after reaching record levels in 2018, corporate venture capital participation dropped in Q2’19. 

Situation in Ukraine

According to UVCA, an industry body, in 2018, venture capital investment in Ukrainian projects increased by 30% to USD337 million. “Although this is encouraging,” says Andriy Usenko, Deputy Director, KPMG Investment and Capital Markets, “Ukraine's share in the global venture capital market remains insignificant - about 0.1%.”

“Nevertheless,” he adds, “given the historic underinvestment in the economy and growing interest in the local market from Ukrainian investors, we expect to see continued positive dynamics in the medium term. The long-awaited launch of the Ukrainian National Startup Fund and the Invention Support Fund, will provide a significant boost.”

Finally, says Usenko, to complete the picture, “large local companies are also implementing investment projects and are actively investing in startups.”

Global trends to watch

Heading into Q3’19, the trend towards a smaller number of late stage deals is expected to continue globally, which could affect the ability of some high-quality early stage companies to attract funding. AI is likely to buck this trend given its almost unlimited potential to cause industry disruption – and the significant amount of attention it is being given by corporate investors. As well, the outlook for IPO’s in the US remains quite positive. 

“With a significant amount of private capital still available in the market and a stable economy, we expect VC investment will continue at a solid pace into the next quarter,” said Brian Hughes, Co-Leader, KPMG Enterprise Emerging Giants Network, KPMG International and Partner, KPMG in the US.

“With this strong performance and the robust economy, we’re likely to see many more VC backed IPO’s over the next few quarters.”

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