2016 ended at a cautionary note for investors as financing to venture capital-backed firms the world over hit a low in Q4 2016 with deal count dropping below 2000 for the first time since 2013 and $21 billion being invested in these deals during the period, hardly a surprise amid 2016 already hailed as a reset year for “exuberant funding” dominated 2015.
In 2016 funding to VC-backed companies globally was recorded lower at $100.8 billion across 8372 deals when compared to the previous year. while there was only single deal above $1 billion and 32 rounds above $100 million, according to the PwC/CB Insights MoneyTree Report released on Wednesday.
In fact, financing to US VC-backed companies continued to drop-off as investors worked with much caution during the quarter with 14 per cent slowdown in deals and 17 per cent decline in total funding from the prior quarter.
Last year saw a total of $58.6 billion invested across 4520 deals, down 16 per cent and 20 per cent respectively from 2015, said the report. In short, there was a drop in global deals including Asia where deals and dollars both plunged.
“Global venture capital financings ended 2016 on a cautionary note. The soft IPO market and rationalisation of market valuations toned down investor enthusiasm with both valuations and number of new financings experiencing sequential and year-over-year declines,” said PwC Partner Raman Chitkara.
He further noted that the decline was not unusual given the spike in investor interest in 2015, which led to minting of a record number of Unicorns. Moreover, an absence of major Unicorn IPOs in 2016 also influenced investor enthusiasm towards new investments.
As Anand Sanwal, co-founder and CEO of CB Insights put it, “2016 served as a nice reset to 2015’s exuberant funding environment. But for those who predicted 2016 would be the popping of the venture bubble, it was not.”
However, he admitted that it was a tougher year in terms of deal activity and funding, but versus 2014, which “we can call a more normal period, 2016 compares quite favorably.”
According to a recent report from Preqin total number of VC deals in 2016 were at almost 9,717, down from the 11,115 transactions recorded in 2015. Even if 2016 surpassed 10,000 deals, it may yet mark the lowest number of annual deals seen since 2012, the investment research firm had noted.
Asia continues to stall
In line with the global VC activity in the last year and particularly in the last quarter, the action in Asia also decreased in both deals and dollars in Q4 2016, dropping to $5.5 billion in funding for the quarter, down 25 per cent from $7.3 billion the quarter before.
There were 337 deals into VC-backed Asian companies, the third quarter in a row below 400, the report noted. In fact every major sector in Asia saw a slowdown in Q4 2016, with internet companies dropping the most by 43 per cent in funding.
Conversely, non-internet/mobile software jumped by 178 per cent, fueled by a $120 million Series B to computer vision developer SenseTime.
“While Q3’16 saw corporates participate in 43 per cent of all deals in Asia, we saw a pullback and reversion to the norm with corporate participation reaching 34 per cent,” said the report.
Early-stage deal size jumped from $2 million in every other quarter in 2016, to $3 million in Q4 2016.
Amid all this, a trend that has continued into Q4 2014 from earlier quarters was that internet companies kept attracting the maximum interest from investors holding the top spot in terms of funding during the quarter.”Despite total funding dollars to Internet companies diving 26 per cent from Q3’16, the sector retained the top spot with $4.6 billion of funding,” said the report.
Not only that, internet accounted for 39 per cent of US deal dollars for the quarter, far more than any other sector. Meanwhile, funding to mobile & telecom companies rose 19 per cent from Q3 16, bumping out Healthcare as the second-place sector by deal value.
“Despite continued deceleration in venture capital investment activity, the startup ecosystem remains flush with quality deals…As industries continue to be disrupted by technology and Internet capabilities, new opportunities are emerging. It’s these opportunities, despite the decline, that continue to drive venture capital momentum,” said US Venture Capital Leader at PwC Tom Ciccolella.
Not just internet, artificial intelligence (AI) is becoming a major disruptor across a number of sectors with record level of investments in AI in 2016. “This is likely to continue in 2017, as AI moves from the technology sector to other traditional enterprise sectors like automotive, financial services and healthcare,” said PwC Partner Anand Rao.
What is in store for 2017
“VC investment trends in 2017 will be impacted by the reaction of capital markets to upcoming Unicorn IPOs, as strong investor receptiveness to IPOs generally boosts VC investments,” said PwCs Chitkara.
Going by local and regional VC firms, 2017 is going to be a year of downrounds with valuations softening from the hyped levels they were durig 2015. “They(startups) are still having a burn rate and losing money and they cannot raise another round. But, no one would come in at that valuation,” serial entrepreneur and TinkBig’s founding partner Andrew Tan had told DEALSTREETASIA last year.
Many feel that this year too the unicorns and mega-rounds could see some of the same headwinds as in 2016. Nevertheless, interestingly, the introduction of new big money investors from the likes of Asia and increasingly the Middle East may serve to offset that, according to Anand Sanwal.
To talk of the new big money from Asia, a report from Preqin in September last year had said that more institutional investors are interested in venture capital in Asia, than any other region, a survey of venture capital fund managers.