Handful of USD$1 billion-plus investments in highly valued unicorns buoy funding in North America and Asia, while global deal activity continues to decline after record levels in Q2 2015.Caution continues to dominate VC market as investors focus on proven companies amid global macroeconomic upheaval.
Continued investor concerns over startup valuations, macroeconomic upheavals, the ramifications of Brexit, and an uncertain exit environment for portfolio companies translated into another down quarter for investment deals in venture capital (VC)-backed companies. According to Venture Pulse, the quarterly global report on VC trends published jointly by KPMG International and CB Insights, Q2 2016 saw USD$27.4 billion invested across 1,886 deals globally, representing a slight increase in total funding over Q1 2016 but a fourth-straight quarter of investor pull-back in activity. The total number of deals declined an additional 6 percent from Q1 2016, after reaching a high in Q2 2015.
The trends visible across major venture hubs were decidedly mixed. North America and Asia saw funding climb slightly across fewer deals, while Europe saw total investment drop 20 percent as deal count rose. Europe continued to show robust early and seed stage activity.
"It’s a challenging time for VC investors,” said Brian Hughes National Co-Lead Partner, KPMG Venture Capital Practice, and a partner for KPMG in the US. “There’s a lot going on, with uncertainty dominant in every market. Many investors are holding back to see how these uncertainties shake out, while others are focusing on companies they see as having a solid foundation and growth plan – like Uber, Snapchat and Didi Chuxing.”
Key Q2 highlights:
Anand Sanwal, CEO of CB Insights, commented: “The story of this quarter is the continued decline in deal activity. Unless you’re 1 of 5 companies for which there is insatiable investor appetite, it is becoming tougher to raise money from VCs and the assorted cast of characters who’ve entered the investment fray, i.e., hedge funds, mutual funds, sovereigns, corporations, etc. Expect to see lots of companies talking about profitability and taking on cost-cutting measures in the coming quarters.”
In addition to presenting key global findings for Q2 2016, the Venture Pulse quarterly report series examines the state of venture capital investment on a regional basis, including key trends and analyses for Asia, North America and Europe.
$100 million-plus financings continue slide from mid-2015 peak
Large mega-round activity (deals over $100 million) continued to slip, with 35 in Q2 2016 compared to 40 in Q1 2016 and 73 in Q3 2015. Traditional VCs as well as crossover investors such as mutual funds and hedge funds have continued to be more conservative in their commitments to such large deals.
Asian companies outpaced their North American counterparts for the second straight quarter in these large financings, with 17 mega-rounds compared to North America’s 14. Both figures represent a decline from the previous quarter. Comparatively, Europe saw one more mega-round than in Q1 2016, although with only 4 mega-rounds in total, the region lags its counterparts substantially.
North America and Asia see funding climb but deals slip; Asia sees a sharp pullback in funding and deals
Regionally, North America still leads global venture capital activity by a considerable margin. With $17.1 billion invested in the second quarter of the year, funding rose 10 percent over the $15.5 billion of funding raised in Q1. However, this financing total is skewed heavily by the $5 billion-plus injected into Uber and Snapchat alone. The removal of those outliers shows a very different financing trend.
Despite the growth of funding in North America, deal count fell to 1,117, down 8 percent from Q1 2016. Q2’s quarterly deal total represents a 24 percent year-over-year decline, as well as North America’s lowest deal activity levels since Q1 2012. Seed activity remained relatively depressed, with the percentage of seed deals remaining at 28 percent, down from 33 percent in Q3 2015.
Asia experienced a similar trend of increased funding across a declining number of deals. In Q2 2016, Asia saw $7.4 billion invested across 343 deals. This compares to $7.2 billion invested across 389 deals in Q1 2016, and is a far cry from the $14.7 billion and 453 deals seen in Q3 2015. Seed deal share rose to a 5-quarter high of 39 percent as seed-stage deals held steady in absolute terms while the number of other deal stages declined.
Among major markets, Europe was alone in seeing the number of deals grow, up 5 percent to 385 for the quarter. However, this was accompanied by a funding decline of 20 percent to $2.8 billion. After dropping sharply in Q1 2016, seed-stage deal share jumped back to 49 percent of all European deals, widening the gap versus other regions.
Unicorn creation rate recovers slightly, though still fraction of 2015 highs
Q2 2016 saw the unicorn birth rate climb for the first time in 3 quarters, but still featured less than one-third of the number of unicorns birthed during the Q3 2015 peak. Of Q2’s 7 new unicorns, 5 were in North America, with just 2 in Asia and none in Europe or elsewhere. Among the quarter’s new unicorns were Zoox, SMS Assist and Human Longevity.
“The long-term impact of Brexit won’t be clear for a while – which will create even more uncertainty in the market,” says Arik Speier, Head of Technology, KPMG Somekh Chaikin in Israel. “This will likely keep investors cautious. While we will likely continue to see follow-on investments in unicorns that have substantial business and a clear path to profitability, some others may not be able to raise future rounds or will, alternatively, experience deep cuts in their valuations and down rounds.”
Corporates maintain pace of investment
A more enduring trend has been that of strong corporate and corporate venture capital (CVC) investment into VC-backed companies, with Q2 2016 corporate VC participation tying last quarter’s high of 26 percent. Once again, Asia saw the heaviest involvement from corporations, with 34 percent of deals there involving corporations. By comparison, North America and Europe saw 25 percent and 23 percent participation rates – both 5 quarter highs despite lagging behind Asia.
Anand Sanwal of CB Insights said: “While the deal levels look poor especially relative to the ebullience we saw in Q3 2015, if you look at this quarter’s numbers against a longer timeframe, we’re still at very healthy funding and deal levels. In other words, the sky is not falling but the forecast is definitely uncertain. One piece of good news we are seeing is the consistency of corporations. They were the first investors many expected to cut and run should times get tough. It looks like they’re continuing to stay committed which is a good thing for startups and their investors."
Malta – interesting times ahead
Developments in the global world of early stage business activity is increasingly relevant for Malta, with David Pace, Deal Advisory Partner within KPMG in Malta noting that there were exciting developments locally. “The local early stage business ecosystem is steadily taking shape and this was particularly visible to those who attended the digital business conference, Zest, last month.” Focusing on the local investor perspective, he commented “We have followed a sustained interest by local resource-rich family
businesses and successful entrepreneurs to consider investments into early
stage businesses.” He attributed this trend to such investors viewing this
route as a means to achieve a number of objectives. These included growth
ambitions (often otherwise stifled by saturation in their core markets), a
desire to diversify beyond their current offering (enabling say different
family members to have their area of focus), to leverage synergies (ranging
from access to clients, markets and geographies to value chain benefits) and
finally to also improve returns on idle cash reserves.
*Note: all figures cited are in USD.
Partner, Deal Advisory, KPMG in Malta
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