2015 was a very active year for venture capital firms. Whether due to an overabundance of good ideas or an excessive optimism on VC firm’s part — or perhaps even a mixture of the two — the year saw a lot of companies get funded at ultra high valuations. However, the excitement appears to be somewhat cooling and VC funding has hit its lowest point in two years.
According to a report by CB Insights, Venture Capital firms have adopted a cautious approach that is different to the way they were doing things back in 2015. The total money invested in companies on a quarterly basis has gone down, as per comparison on a year over year basis.
Q3 2016 saw USD$24.1 billion invested across 1,983 deals globally, representing a very slight deal increase from Q2 2016, but a 14 percent decline in total quarterly funding. Although the deal volume is still quite healthy by pre-2014 standards, this was the lowest quarter of funding since Q3 2014.
The reason behind this decline is no great mystery either. 2015 was truly an exceptional year as far as the flow of VC funds was concerned and the collective euphoria that appeared to have gripped the ecosystem at 2015’s peak, has worn off. However, with lesser than expected ROIs along with difficult economic and exit environments, VC have become somewhat more wary.
The scenario has also matured. Investors are now seeking to have a more direct presence in the affairs of the company they are funding. A trend that was strengthened after the $9 Billion valued Theranos was devalued to $800 million within the span of a couple of years.
Meanwhile, the flood of billion dollar valuations has stemmed. While the July to September period in 2015 saw 25 companies attain the status of Unicorns and be valued at a billion dollars or more, the same period in 2016, has seen the number of billion dollar valuations come down to merely 8. Again, incidents like the Theranos debacle have had a significant role to play in the same.
The scale of funding has come down as well, indicating that the market is finally stabilizing. As per the report,
After $100M+ checks flowed freely to VC-backed companies through much of 2015, the mega-round trend has settled into a lower range through 2016. North America saw just one more $100M+ than Q2’16, while Asia held steady at 17. Meanwhile, Europe saw just a single mega-round in Deliveroo’s $275M Series E.
Interestingly enough, corporate interest in investment is steadily going up as well. Most large corporations have already established or are in the process of setting up CVC funds to put in money into startups. Indeed, corporate participating reached a 5-quarter high with 28% of all deals, sponsored by corporate backed funds.
Meanwhile, experts are looking at the scenario in optimistic terms. According to them, the market appears to be reaching maturation and the focus has shifted from investments to IPOs. Investors are making decisions that are significantly better thought of than in 2015. The field is also expected to witness a rise in activity once the results of the US elections are declared.