Venture capital stalled: Deals and dollars plummet in 2016

11 Jan 2017

It’s the end of the bullish venture capital era for now. Image: Robert Cicchetti/Shutterstock

Venture capital deals and dollars plummeted significantly worldwide in 2016, according to the latest data from CB Insights and PwC.

The latest figures in the MoneyTree report from PwC and CB Insights present a jarring shift in venture capital (VC) investor sentiment and a possible turning point, after a heady few years that saw the rise of so-called unicorns.

In the US market in 2016, deals and dollars dropped 16pc and 20pc, respectively, compared to the previous year.

The US full-year funding total of $58.6bn represented a 20pc drop from 2015, while cumulative deals of 4,520 fell 16pc.

‘2016 served as a nice reset to 2015’s exuberant funding environment’

Globally, the trend was similar, with worldwide deals and dollars declining 10pc and 23pc, respectively, in 2016, compared to full-year 2015.

US mega-round activity – that is, rounds over $100m – hit a five-quarter low in Q4, with 11 in total, compared to 15 in Q3 2016.

Europe saw zero new VC-backed unicorns this quarter, but overall funding to the region rose 22pc to $3bn. Meanwhile, Asia financing dropped 25pc to $5.5bn.

“Despite continued deceleration in venture capital investment activity, the start-up ecosystem remains flush with quality deals,” said Tom Ciccolella, US venture capital leader at PwC.

“As industries continue to be disrupted by technology and internet capabilities, new opportunities are emerging. It’s these opportunities, despite the decline, that continue to drive venture capital momentum.”

Artificial intelligence (AI) remained a hot area, as investors poured $705m in financing to US AI companies across 71 deals (up 16pc and 22pc from Q3 2016). On the other hand, cybersecurity and autotech saw funding dollars recede for the quarter.

The end of the exuberance: 20pc venture capital funding drop in US in 2016

In Q4 2016, investors deployed $11.7bn to US VC-backed start-up companies across 982 deals, down 17pc in dollars and 14pc in deals from Q3 2016.

Both quarterly figures were also down from Q4 2015 and set the quarterly lows for 2016, which had already seen start-up investment recede from the peaks of 2015.

Deal activity, having fallen off consistently throughout the year, has now reached a multi-year low, with the quarterly count failing to crack 1,000 deals for the first time since Q4 2011.

In all of 2016, just four new unicorns – or private companies valued at $1bn plus – were minted in the US, equal to the figure from Q3 2016.

This unicorn creation rate remains a fraction of what was seen in 2015, which peaked at 16 in Q3 of that year.

All three of the major technology and start-up hubs of Silicon Valley, New England (including Massachusetts), and New York Metro saw deal activity declining from the quarter prior.

Silicon Valley-based companies saw the sharpest drop-off, with $3.9bn invested across 310 deals, down 37pc in dollars and 22pc in deals from Q3 2016.

“2016 served as a nice reset to 2015’s exuberant funding environment,” said Anand Sanwal, co-founder and CEO of CB Insights.

“But for those who predicted 2016 would be the popping of the venture bubble, it was not. Yes, it was a tougher year in terms of deal activity and funding, but versus 2014, which we can call a more normal period, 2016 compares quite favourably.

“In 2017, unicorns and mega-rounds could see some of the same headwinds as in 2016, but interestingly, the introduction of new big money investors from the likes of Asia, and increasingly the Middle East, may serve to offset that. An expected healthy IPO and M&A market should also serve to help the VC market as well.”

Charging Bull sculpture on Wall Street. Image: Robert Cicchetti/Shutterstock

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years