After two successive quarters of decline, global venture capital funding witnessed a a slight uptick of 3 per cent in the second quarter of 2016 to reach $27.4 billion across nearly 1,900 deals, according to the latest CB Insights and KPMG Venture Pulse report.
Although the number of deals continued to decline, reaching 1,886 in the quarter- the lowest level since Q2-2013, mega rounds worth over $1 billion – in “decacorns” like Uber, Snapchat and Didi Chuxing – helped buoy investment, the report added.
Series A level deals saw a drop in April-June, accounting for less than a quarter of all deals in the period. However, angel-to-seed level deals witnessed a rebound to make up 35 per cent of the total deals done in this quarter.
In terms of the deal size, median early-stage deal stood at $2.3 million, falling marginally over the previous quarter. However, the average ticket size of late-stage financing rounds bounced back after two slow quarters to reach $25 million.
Bigger-ticket transactions cooled down compared to 2015, a year that saw investors write a lot of $100+ million cheques into private tech companies. In the second quarter this year, only 14 such deals happened in North America, while the number had hit 37 in Q3 ,2015. Asia outperformed North America in this category for the second quarter in a row.
Even as the funding activity in North America continued to fall, reaching 1,117 deals in the quarter, the collective value of deals rose from $15.5 billion to over $17 billion. Meanwhile, Europe surpassed Asia in deal count for the first time in five quarters although the region’s funding accounted for 38 per cent of Asia’s total VC investment.
According to the report many investors are taking a “wait-and-see” approach to the VC market rather than switching their investment focus entirely. These investors are using the current market climate as an impetus to raise additional funds, rethink their portfolio of investments and focus more diligently on identifying companies that have strong business models and plans to achieve profitability.
The “wait-and-see” attitude is triggered by concerns over the exit from the EU by the UK, the upcoming US presidential election and China’s economic slowdown.
“Brexit has the potential to disrupt the disruptors. In the current environment, forecasting how much of an implication there will be on VC investment is difficult. […] But there is no doubt the aftershocks will be felt not only in the UK, but across Europe and, ultimately, the globe,” commented Jonathan Lavender, principal and head of markets for KPMG in Israel.
According to the report, other locations may find this a prime opportunity to attract VC attention away from the UK, allowing other startup hubs to gain prominence.
Adding to this cautious psychology is a number of high-profile IPOs failing to achieve their private valuations, which impeded the making of significant late-stage investments.
“Many of the high-profile tech IPO’s from 2015 continue to trade well below their initial offering price, putting pressure on private company valuations and this, combined with economic concerns in China and Europe, has continued to put a damper on VC investment,” said Brian Hughes, co-leader at KPMG Enterprise Innovative Startups Network.
More investors have demanded investor protections as a key component of any funding granted, wanting assurance of protection in the event of a down round or less than ideal IPO exit, the report added.
In addition, as more unicorns are turning into “uni-corpses”, low valuations may cause many companies to fail to attract financing in the next quarters. Only 7 new VC-backed unicorns were minted in Q2 this year, two more than the previous quarter but still remarkably fewer than the double digit unicorn births seen in 2015.
“Despite the further drop in the number of VC deals, there are strong indications that market activity will rebound heading into the second half of 2016 and into 2017,” the report said.
Proven models preferred
As a result of the risk of venture funding amid economic uncertainties, proven companies won the majority of investment in Q2, and this trend is likely continue, especially in North America and Asia, where large funding rounds went to Uber, Didi Chuxing and Snapchat.
While more seed and early-stage rounds were happening in Europe, the other two regions saw investment leaning toward later stage deals. “Regardless of deal stage, VC investors across all regions appeared to be more hesitant with respect to their investments. They are no longer willing to throw money at promising but poorly organized companies,” the report says.
It also shows that area of artificial intelligence has experienced rapid growth over the last 5 years, and virtual reality are poised for further growth.
In Q2, 2016 the investments in AI increased on a global scale, while other high-profile sectors such as digital health experienced plummeting funding.
Virtual reality also received a significant boost, as VC investors and virtual reality companies announced the development of a $10 billion fund focused on augmented reality and related innovation. This new fund is a prime example of how VC investors are placing bets that this field will grow exponentially in the years ahead, according to the report.
The involvement of corporates in venture funding was clearly visible during the quarter, with more large business groups setting up corporate VC arms and maintaining activity in private markets.
Corporates and their VC units participated in around 26 per cent of all deals to VC-backed companies this year to date.