As we enter into what has been proclaimed the 'Fourth Industrial Revolution' by the World Economic Forum, venture capital funded companies (VCFCs) continue to disrupt traditional markets, albeit under tightening investment activity. More recent data on this trend has been made available by KPMG International and CB Insights in their quarterly global report on venture capital (VC) investment trends, Venture Pulse Q4 2015. The report analyzes the latest global trends in VC investment and provides insights from both a global and regional perspective, also looking at investments in different industry sectors.
Highlights of VC investment trends in 2015
Globally
While overall investment in VCFCs hit a multi-year high in 2015, investors became more cautious with their investments late in Q3, which led to a significant decline in VC investment in Q4 as the total amount of investments in the sector decreased 30% from $38.7 billion in Q3 to $27.2 billion in Q4, with the total number of investments decreasing 13% over the same period.
Notably, VC investment in certain industries progressed despite the global downturn. While the financial technology (fintech) sector was not immune from the overall reduction in VC investment, investment in education technology VCFCs increased over 300% from $295 million in Q3 to over $1 billion in Q4.
North America (North American VCFCs)
In North America, VC investment reached a five year high in 2015; however, there was a significant decline in Q4 as the total amount of investments decreased 32% from $20.8 billion in Q3 to $14.1 billion in Q4, with the total number of investments declining by 16% over the same period.
Understanding the M&A market for VCFCs in 2016
The report connects the overall drop in investment activity to global investors' pessimism and concern regarding (1) an uncertain global economy, (2) expected interest rate increases, (3) overheating in VC ecosystems and (4) inflated price valuations for VCFCs as a thirst for innovation among mature companies is driving up the price of startups. Further, the report predicts that these trends and, therefore, investor caution is likely to continue into 2016.
As such, companies looking to merge or acquire VCFCs should be wary of these trends and should look to protect themselves from unfortunate results. Indeed, this is especially important in 2016 as the report predicts that the amount of VCFCs exiting via IPO and M&A are expected to rebound from the depressed numbers in 2015, based on the following theses:
- investors may now be skeptical of keeping companies private over the longer term as they are not meeting private sector valuations; and
- as VC investment has slowed, there already has been significant consolidation or merger activity among VCFCs.
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