Is VC Startup investing the sign of a Fourth Industrial Revolution?
Some skeptics wonder if there is a Silicon Valley venture capital ‘bubble’ looming, or if venture capital firms invest in inflated ‘Unicorns’ that may disappear once they are in the hands of the public.
2015 was a record setting year, with Venture Capitalists investing over $128 billion globally, which is a 44% increase from $89 billion in 2014. This is the largest amount invested since 2000 - the dotcom bubble year - according the 2015 Venture Pulse Report that compiled data from consulting firm KPMG and CB Insights.
Where's The Venture Money Going?
Innovation is much more than just a buzzword in today’s business environment; there is no word that is more powerful or all-encompassing. Everyday innovative startups
Companies like Uber, We Work and Airbnb, are great examples of the scale and scope of the technological transformation encompassing our world. This year’s 46 annual The World Economic Forum calls this era of innovation the “Fourth Industrial Revolution”.
A key trend is the development of technology-enabled platforms that combine both demand and supply to disrupt existing industry structures, such as those we see within the “sharing” or “on demand” economy. These technology platforms, rendered easy to use by the smartphone, convene people, assets, and data—thus creating entirely new ways of consuming goods and services in the process.
This past week, business and political leaders are in Davos, Switzerland to discuss how to navigate these unprecedented changes in technology. This is a monumental discussion, because these regular and system-wide innovations are going to continue to disrupt and crack the foundations of traditional industries for decades to come. Established companies need to recognize this and make sure that they will be agile enough to pivot and succeed wherever change takes them.
In 2015, 71 VC Backed Companies raising $128.5 Billion
What sets 2015 apart are the size and scope of the VC funded investment deals.“From
This report states that 71 VC-backed companies achieved “unicorn” status, or valuations in excess of $1 billion, compared to only 53 in 2014. This focus of VC investors on
2016: Focus on the Fundamentals will be Critical
From this report’s data, it is shown that this coming year is expected to reign in more deals. VC investors will still likely be keen to make investments in innovative companies that could completely redefine whole industries. These startups must have their financial house in order- meaning a sound business plan, a revenue model, positive cash flow and low burn rates. We will see some Unicorns, which will go through “down rounds”, who end up getting sold or funded at less than half of their prior valuations.
So what industries are the most ripe for massive change? That is the beauty of the Fourth Industrial Revolution, there is no industry that is immune to technology and innovative change. Basically every problem is one that can
VC Investments Declined as Market Realities Took Hold
The first two quarters were incredibly strong for investments. But after a stalled Chinese stock market, and expected interest hikes, VC investments dropped from $38.7 billion in Q3 to $27.2 billion in Q4. The number of deals hit a low that it has not seen since Q1 of 2013. As this graph depicts, even though the number of funded deals dropped, the total amount that was raised increased by 44 percent.
“The drop-off was most noticeable in Asia, where China and India received significantly less funding than in all previous quarters of 2015,” the report noted. “Comparatively, Europe experienced the least decrease in VC activity, although both the number of deals and the total deal value in Europe remain small compared to other regions of the world.” The report concluded that “The drop in VC investment signifies a shift in thinking as global investors seem to be taking a less bullish view of the market.”
The US in 2015 reached a 5 year funding high, reaching $74.2B across 4890 deals. Funding was up 26%, while deals fell 10% versus the previous year. Overall deal activity has reached its lowest point since 2012 In the regional results, California leads and New York has outpaced Massachusetts for funding deal activity in the past 5 quarters.
Although the US overall saw a significant pullback in the fourth quarter with a number of IPOs in Q4 falling short of previous private valuations, which made investors more cautious. In 2016 this may make investors start to question the model of keeping companies private over the longer term. Some of the factors affecting the VC investment decline in Q4 are:
Decreasing mega-round funding ($100 million+).
IPOs falling short of private valuations - Square, Box etc.
Implications of potential interest rate increases.
Despite North America’s
“Up until the third quarter of 2015, we saw as much capital going into companies that were generating negative cash flows as those that were generating positive ones. Now, there’s been a divergence. In 2016, the fundamentals are really going to start to matter again. Startups that may be operating with negative gross margins, excessive burn rates and inflated valuations will be the most impacted.” Brian Hughes Co-Leader, KPMG Enterprise Innovative Startups Network, and National Co-Lead Partner, KPMG Venture Capital Practice, KPMG in the US.
Mobile and Internet Tech Companies account for ⅔ of all VC funding deals
Internet and mobile software technology continue to represent the bulk of deals to VC-backed companies, as the two major sectors accounted for 66% of all deals in Q4’15. All other sectors remained fairly range-bound with healthcare accounting for 13%, software 6%, and consumer products & services 4%.
A New Era of Innovation Transforming Business
A look back at 2015 Unicorns showcases the wide range of innovation already transforming business. These startups are using technology and innovation to:
Change how people shop and access services: Companies like Jet.com (US$500M –Series B funding) – a club-based retailer selling goods based on real-time pricing algorithms, and Gerson Lehrman Group (US$212M – Private Equity – II funding) – A membership-based platform that provides independent ad-hoc consulting services.Change how people communicate: Companies like Vice Media ($US 200M – Corporate Minority – III) – an investigative youth media company and digital content creation studio.Change how people travel: Chasing the coat tails of the on-demand ride sharing startup Uber, Companies like Lyft ($US 24.7M – Series F) – a company connecting people who need a ride with people who have a car, and GetYourGuide ($US50M – Series C) – a destination services company for booking vacation attractions and activities.
Change how people dine: On-demand startups like Deliveroo (US$100M – Series D) are offering online food ordering and delivery services.
These are exciting times, both for innovative startups and for VC investors.
Conclusion
Is there a “bubble” coming? This would imply that a collapse is near, we don’t think the macro situation is quite that dramatic. According to Accel Partners, “There will, however, continue to be a reset in valuations in sectors where business models and unit economics are unproven”.
If you’d like to learn more about what happened in the VC world in Q4, or would like to stay abreast of key trends in venture capital activity and learn more about the latest innovative startups that are helping to shape the Fourth Industrial Revolution, reserve your tickets to the 2016 Startup Grind Global Conference in Palo Alto on February 23 and 24. Or if you are in the NYC Fairfield County area, check out the next Startup Grind Greenwich fireside chat event.