Venture funding in Europe is up 8pc, despite the global venture funding chill continuing, with the total amount of VC funding worldwide falling to $25.5bn in Q1. Not only has deal activity slowed but fewer unicorns are being minted.
The latest Venture Pulse Report – Q1 2016 by CB Insights and KPMG shows that, following the cratering of deal activity in Q4 2015, financing slowed again in the first quarter to end at 1,829 deals globally, amounting to $25.5bn in investment.
The decline was largely impacted by the slowdown in Asia.
As existing unicorns – tech start-ups valued at over $1bn – battled negative press, down-rounds and markdowns, only five new VC-backed unicorns were minted in the first quarter – that’s less than half of any quarterly total during 2015.
US deal activity continued to cool with $14.8bn invested across 1,035 deals.
Funding climbed slightly from the $14bn in Q4 2015 but remained depressed compared to the peaks of 2015.
Deal activity dropped across all markets, including America, Europe and Asia.
In the US, later-stage deal sizes are shrinking to an average of $21.5m from $30m in the fourth quarter of 2015.
There are also continuing signs of seed fatigue, with seed deal share falling to 22pc.
Series A rounds actually outpaced seed deals, reversing the trend of previous quarters.
What’s going on in Europe?
However, Europe appears to be bucking the trend, with total funding up 8pc to $3.5bn in the first quarter spread across 338 deals. However, the deal count represents a sequential quarterly decline.
Spotify’s massive $1bn funding round during the final week of the quarter lifted expected results for the region by almost one-third. As a result, VC deal value was up slightly compared to the fourth quarter of 2015.
Seed share fell below 40pc of all deals for the first time in Europe in five quarters, capturing just 35pc of all deals, while Series A round funding jumped to take a quarter of all deals.
UK-based start-ups raised $1.3bn in funding across 105 deals, accounting for 36pc of all VC deals in Europe. UK deals were headlined by a $192m Series C funding to Skyscanner in January.
Funding in German VC-backed start-ups fell to $394m in the first quarter of 2016, marketing a fourth-straight quarterly drop.
However, deal count rose for the fourth consecutive quarter as there were more early-stage seed and Series A rounds.
Another point worth noting that isn’t contained in the CB Insights/KPMG report is that new funds are constantly being raised in Europe, with many being raised during the first quarter.
Yesterday, we reported that Accel has raised a $500m fund specifically for European and Israeli start-ups.
Last week, we reported how Atlantic Bridge Capital has closed a new $140m fund to invest in up to 20 European companies.
Other fundraisings that have closed recently include Index Ventures closing a $550m fund for US, European and Israel firms.
Lakestar last year announced a $400m fund for European and US start-ups.
And earlier this year, Cocoon Networks, a spin-off from China Equity Group, launched a new $715m investment fund specifically for European start-ups.
The Asian VC funding market continues to spiral with deal numbers in start-ups dropping 9pc and funding dollars crashing 34pc.
Mega funding rounds became a rarer sight in Asia, with median late-stage deal sizes crashing from $154m in the fourth quarter of 2015 to $62.5m in the first quarter of 2016.
VC-backed companies in China received $4bn in funding – just 39pc of the peak reached in the third quarter of 2015.
Compared to the heady days of previous quarters that saw multiple VC deals worth over $1bn, there was just one $1bn deal in the first quarter of 2016, a $1.2bn investment in Lu.com.
In India, investment continued to decline, with deals dipping 4pc while funding fell 24pc as VC-backed start-ups raised $1.2bn on 116 deals.
The goring of the unicorns
CB Insights and KPMG’s report signals that the year ahead will be tough on unicorn companies valued at more than $1bn.
With high-profile companies failing to live up to their private valuations, existing and potential unicorns are coming under more scrutiny than ever before.
This is especially the case in the US, where investors are stepping back from mega-deals and feel that high valuations in the market may be unwarranted.
To continue attracting funding, companies will need to show tighter control of their expenses and reveal positive margins.
Those that demonstrate positive margins and controlled expenses and profitability will attract investment, while those that fail to do so will fall by the wayside.
Europe image via Shutterstock