KPMG and CB Insights (CBI) have published their Venture Pulse Q4 report, which looks at the trends inside the global venture capital community. It found that 2015 was a record year for investment, with over $128 billion invested across 7,872 deals, up 44% from 2014’s total.
But the stalwart technology sectors are receiving less interest from investors, as the global VC community turns its attention to newer, shinier opportunities. The latter half of the year also saw the community slow down significantly, with Q4 dipping to just $27.2 billion amid a record-low number of deals.
According to the figures, the Mobile and Telecommunications sector has seen $5 billion per quarter vanish from investment, which is a looming issue for future innovation, if you consider startups and successful exits the source of the more disruptive technologies in the OTT video and networking markets.
The Internet investment sector grew from 46% in Q4 2014 to 50% in Q4 2015. The Mobile and Telecommunications sector shrank from 20% of the total to 16% at the end of the period. Healthcare stood at 13% at the end, up from 12%, with Consumer Products and Services up to 4% from 3%. The Software (non-internet/mobile) segment remained flat at 6%, and the Other sector dipped one point to 12%.
Based on these demographics, technology as a whole shows no sign of diminishing in importance to VCs, but that four-point shrink in Mobile and Telco accounts for $5.1 billion per quarter. That’s a very significant chunk of money, no longer chasing the communications opportunity.
If the four-point decrease never happened, there would have been an extra $20 billion invested in mobile and telcos in 2015. While late-stage IPOs will account for much of that figure, the far lower early-stage investments will also take a hit here, and those can be the most influential in terms of disruption.
Allowing smaller companies to make it to market with their new ideas is key to a market that needs to avoid stagnation. With billions of dollars per year effectively vanishing, these diminutive startups are missing out on a shot at the median $3.2 million (in the USA at least) early-stage investments that might bring forth the next disruptive technology in the video ecosystem.
The global drop off in total investment was most noticeable in China and India, although Europe saw the least decrease in VC activity in Q4, although it remains a significantly smaller VC market than Asia or North America. Whether this is a trend that continued into Q1 2016 won’t be seen until the next quarterly report, but that spike in investment was a sign of improved market confidence – which only takes a few bad headlines to come crashing down again.
KPMG and CBI believe that this decline signifies a shift in thinking, “as global investors seem to be taking a less bullish view of the market. An uncertain global economy, a projected slowdown in China, and expected interest rate increases following the recent increase in the US seem to be driving some investors to hold back their dollars.”
A number of Q4 IPOs fell short of their expected valuations too, and some are reportedly writing down their investments to match a more realistic market valuation. The pair conclude that this investor caution is likely to have continued into the first quarter of this year, but that while VC activity will decline, M&A deals will likely increase.
As for the practicalities of investment, the report says that in the first three quarters of 2015, investors didn’t seem to differentiate investments based on positive or negative cash flow. From Q4 onwards, KPMG and CBI think that VCs are going to pay much more attention to cash flows, realistic burn rates, and efficient operations – something that you would think would have been a priority in the first place, given the burning reminder of the 2008 collapse, and the earlier dotcom bubble.
The volume of large deals declined in the last two quarters, with Q4 striking only 1,742, the lowest since Q1 2013. However, corporations are becoming more active in the market, rather than the old-guard of investors, accounting for around 25% of all deals for three consecutive quarters. That looks increasingly like companies trying to jump on early opportunities, likely with an eye to acquiring them should their technology prove a hit.
The report notes that the scope of VC investments made in 2015 was surprising, with healthcare, financial technology (fin tech), retail, and education being notable targets – and 72 companies received billion-dollar valuations on the back of these rounds in 2015, compared to 53 in 2014 (achieving “unicorn” status).
US deals cooled in Q4, with the total year’s funding hitting $72.4 billion – by far the largest market. The US median early-deal sign grew 39% in a year, to reach $3.2 million, while seed investment fell 24%. The number of $100+ million rounds in the US more than halved from Q3 to Q4, down to just 18, from 39. Vice Media will be the most familiar name in the top 10 Q4 deals in the US, a content house that secured $200 million.
As for Europe, the new quarterly total seems to be around $3 billion, as the market saw a similar cooling to the US in Q4. However, the median value of late-stage investment deals grew, rising to a five-quarter high of $18.6 million. Despite this, the number of late-stage deals still fell. Overall, the UK accounted for 45% of EU investment, with Germany falling to below $500 million per quarter, largely due to an absence of late-round investment opportunities. Orbcomm was the most notable deal for Faultline readers, securing $460 million in its series H round.
In the Asian investment market, the 2015 total hit a record $39.7 billion, which is more than the previous four years combined. But with the lingering uncertainty arising from the Chinese slowdown, that figure could shrink substantially. In Q4, five deals accounted for 51% of the total. In China itself, Q4 funding fell 29% from Q3, to $7.2 billion.
In Asia, corporate involvement was noticeably higher, with one-third of all deals involving a corporation, compared to the global average proportion of nearer one quarter. Indian funding fell 18% in Q4, to $1.5 billion.