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Desertification of the VC Industry?
- 1. Presented by Eva Rez, Principal, Day One Capital Ltd. City of London Alumni Conference, 18th March, 2016
- 7. Source: http://www.bothsidesofthetable.com/2016/02/04/industry-insiders-think-will-happen-vc-2016/ LPs are likely to maintain their contribution (no significant increase expected) Corporate investments Chinese money across boarders 7
- 8. Source: https://assets.kpmg.com/content/dam/kpmg/pdf/2016/01/venture-pulse-q4-report.pdf Slowdown in China Interest rates are expected to increase in the US Worries about the IPO market Writing down VC investments to fair market value 8
- 9. Source: http://www.bothsidesofthetable.com/2016/02/04/industry-insiders-think-will-happen-vc-2016/; http://www.slideshare.net/msuster/upfront-vc-analysis-2016/9-IPO_exits_are_down_32 Fear factors Oil prices plummeted Slowdown in China Refugee crisis in Europe Presidential election in the US 9
- 11. Picture credit: http://www.123rf.com/ Already less bullish: valuations are more conservative than in the US Low interest rates are likely to stay, which encourages investors to look for higher returns Already more focus on value creation: qualified management and employees, monetisation is more important, sustainable business model 11
- 12. 12
Editor's Notes
- Funding to VC-backed companies in 2015 reached a multi-year high, topping 2014’s total by 44%. Megarounds proved to dominate the startup world in 2015 as, despite the highs in funding, deals actually fell 3% versus 2014.
- Deal share to seed-stage investments dropped below 30% in Q4’15, reaching just 29%. Series A deals reached a 5 quarter high at 26% deal share. Mid-stage (Series B – Series C) deals accounted for 23% of all deals in Q4’15, matching the previous 5 quarter high from Q3’15. Median early-stage (Seed - Series A) deal size among all VC-backed companies was $2.5M in Q4’15, up 14% versus the previous quarter. The climate remains competitive for micro-VCs, multi-stage funds and strategic investors looking at early-stage deals. North American median early-stage deal size continued to increase, reaching $3.2M in Q4’15, a 5 quarter high. Asia and Europe converged, with early-stage rounds reaching $2M for each continent respectively.
- After Q3’15 saw a combined 72 $100M+ equity financings to VC-backed companies, the mega-round trend cooled in Q4, with just 38 such deals. Both North America and Asia saw a significant decrease in megarounds vs exuberant levels seen in Q3’15. The quarter saw mega-financings dip in number to levels last seen in Q3’14. Overall the mega-rounds in major markets in Q4’15 raised over $11.4B vs $20.3B in Q3’15. Median late-stage deals in Asia have been greater than both US and European medians for the last 5 quarters. After Q4’14 saw median late-stage deal size in Asia spike to $230M behind big rounds including Xiaomi’s $1.1B financing, Asia deals once again increased to $150M+ in Q4’15 behind $1B+ financings to China Internet Plus Holdings (the merged entity of Dianping and Meituan) and Ele.me.
- After an exuberant Q3’15, which hit dot com funding levels, Q4’15 cooled dramatically. Sentiment which became very negative in late Q3 quickly manifested itself in Q4 activity as overall investment saw a drastic drop-off in the final quarter of 2015. Funding fell 30% amid weakening mega-round activity while deal activity fell 13% vs. the previous quarter, reaching a level last seen in Q1’13.
- Don’t be fooled by the slight dip in 2015 – the size of funds & timing of deals in market in any year can skew the data set. My conversations with LPs tell me that 2016 is one of their business calendars in years and unless we see an unexpected, sudden downturn expect the market size in 2016 to remain at current levels or increase. How do I know? We surveyed 73 LP firms to get their views on the market. While the data from LPs makes it clear that they have concerns about the pace by which VC firms will invest, 82% said they expected to keep the same pace, which 8% suggested they would increase investments. I would also point out that with corporates investing in more VC funds and Chinese money looking for stability, it’s entirely possible totally new money enters our system.
- Both North America and Asia saw significant drop-offs in total funding to VC-backed companies in Q4’15. North America saw just $14.1B of investment in Q4’15, the lowest quarterly total since Q3’14, while Asia funding fell to $9.7B. Despite the similarity in deal activity in Asia and Europe, Asia captured over 3x the funding in Q4’15.
- As I’ve argued for ages there has to be a correlation between public tech stock valuations and private market valuations. Of course this doesn’t mean private market valuations will follow the same p/e or p/s ratios – they won’t because the expectation is for much higher growth rates in private companies. But it seemed like the correlation became completely untethered in the past 3 years and that’s nonsense. So why the slow down all of a sudden? Leaving aside China, oil prices, Syrian refugees, a presidential election and all of the things that might feed into general market fear – this chart is telling. Frankly, it’s really hard to write checks at later-stage valuations when you know you’ll have to exit into the public markets or sell to a public-market company one day and the stocks are declining precipitously.
- 61% of VCs said valuations were “marginally down” in Q4 of 2015 but 91% expect price decreases in the next two quarters. The anecdotal sentiment I hear from A/B investors trying to get companies financed is that they’re encouraging founders to be “flexible” or “realistic” and the sentiment has clearly shifted from “scale as fast as you can” to “lower burn and make sure you have 18-24 months of cash.” How seriously is the “lower your burn message?” It was actually much louder than I expected. I’ve been giving every company I talk to the sermon about burn rates and returning to pragmatic growth but I underestimated how many of my peers had already started to do the same. In fact, 62% of VCs surveyed – across a wide variety of stages and geographies – said their portfolios were starting to cut costs, expected the markets to tighten. And of course all of these factors are related. If median valuations are down massively, later-stage investors are staring at their trading terminals and fund-raisings are taking longer – of course companies must cut burn rates. And to give you a sense of how long it will take companies to get funded, note that in Q4 of 2015 45% of investors noted it was taking longer to get deals funded. And the outlook for 2016 shows 77% of VCs expect it to take even longer in the months ahead.
- “In 2016, companies seeking VC investment will need more than an innovative product or service. They’ll need a plan to monetize their offerings. That’s because if they don’t know how they’re going to make money, they’ll be hard-pressed to gain attention as the VC environment tightens around the world.” Europe’s decreasing VC activity was less pronounced than in Asia and North America. This may be attributed to VC investors in Europe having already shifted to a more conservative investment approach – a shift only now starting to be felt elsewhere. Many European investors have already focused their attention on companies that can substantiate their business model and show progress toward value creation. At the same time, others are taking an even more conservative approach – holding back available investment dollars in order to see how new business models take hold. As a result, valuations in Europe remain substantially lower than in Asia and North America.
- Self-driving cars, Blockchain, Virtual Reality, Sharing economy, Artificial Intelligence, Cloud based solutions & virtualisation, Digital health, Big Data