Despite a slump in the fourth quarter (Q4), venture capital (VC) financing around the world had a record year in 2015 with US$128.5 billion invested in VC-backed companies. This represents a 44% jump from 2014 and a 156% increase from 2013, according to a new report from Amsterdam-based global advisory firm KPMG International and New York-based analytics company CB Insights.
The record year ended on a weak note, however, with just US$27.1 billion invested across 1,742 deals in Q4. This represents the lowest deal activity since the first quarter of 2013. “Overall market concerns around valuations, burn rates and overfunding put the brakes” on VC investment in the Q4, the report indicates.
The same basic trend was evident in Canadian investment activity, the report reveals, with VC funding dropping to US$291 million in Q4 from US$567 million in the third quarter (Q3) of 2015. Q3 was particularly strong, producing investment activity that was almost as much as the first two quarters combined despite the fact that the 41 deals that were consummated in Q3 was the lowest quarterly total for the year. For the full year, VC funding in Canada came in at US$1.43 billion across 207 deals.
“[Last year] was a record-setting year for VC investment, driven by an incredibly positive first three quarters,” says Brian Hughes, national co-lead partner of KPMG’s VC practice in the U.S., in a statement. “Following a pullback in the last quarter, we expect investors will be looking for companies that have their operations under control, reasonable burn rates and strong plans for early-stage profitability.”
“Sentiment and the outlook became very negative toward the latter part of Q3, which suggested we would see a slowdown. But we were surprised to see the pullback manifest itself so quickly – just one quarter later,” adds Anand Sanwal, CEO of CB Insights, in the statement. “This slowdown was not just for VC-backed companies at the late stages … Q4’s data show that it became harder for early-stage companies to raise money as well.”
On a global basis, the slowdown in Q4 was led by Asia and North America, which both saw deal activity decline by about 32% vs Q3. In contrast, deal activity in Europe declined by just 11% quarter-over-quarter.
The slowdown in North American deal activity touched both seed funding and late-stage financings, the report says, noting that seed activity accounted for just 25% of all deals in Q4, which represents a five-quarter low.
In addition, “the large late-stage rounds that were so prevalent in the first three quarters of 2015 were largely absent” in Q4, the report notes.
“After poor [initial public offering (IPO)] performances for VC-backed tech companies, mutual fund writedowns of still private VC-backed companies and macroeconomic concerns,” large deals, worth more than US$100 million, “slowed drastically” in Q4, the report says.
“Looking ahead into 2016, we anticipate that the uncertain global economy, a projected slowdown in China and the prospect of further interest rate increases in the U.S. will lead to continued cautiousness by VC investors and a likely resurgence of IPOs and [mergers and acquisition] activity around the world,” says Arik Speier, head of technology with KPMG Somekh Chaikin in Israel, in the statement.
See also: Outlook 2016