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Venture Pulse Q3 2016 Summary

Core Content

The Venture Pulse Q3 2016 report provides an analysis of global venture capital (VC) funding trends, highlighting a continued shift in investor behavior and market dynamics across different regions and sectors. It outlines the state of the VC market, the evolution of cybersecurity and digital health investments, and the implications of geopolitical events like Brexit.

Main Trends and Key Insights

Global VC Funding and Deal Activity

• Global Funding: Q3 2016 saw $24.1 billion in funding across 1983 deals, marking an 14% drop from Q2 2016 and the lowest quarterly funding total since Q3 2014.
• Deal Count: Deal activity remained relatively stable, with 1983 global deals.
• Unicorn Activity: The unicorn birth rate remained low, with only 8 new unicorns in Q3 2016, far below the Q3 2015 peak of 25. Asia saw 4 new unicorns, while North America also added 4, and Europe saw none for the second consecutive quarter.
• Valuation Trends: Companies are now receiving more realistic valuations, and the pursuit of unicorn status has decreased. Investors are becoming more tactical rather than chasing high valuations.

Regional Analysis

North America

• Funding: US funding dropped to $14.4B, a 18% decline from Q2 2016.
• Deal Count: 1127 deals, down 2% from the previous quarter.
• Late-Stage Deals: Median late-stage deal size fell to $22.4M, a 34% decrease from Q3 2015.
• Early-Stage Deals: Seed to Series A deals accounted for 49% of all deals, down from prior quarters. The median size of early-stage deals was $3M.
• Regional Variance: California saw a 38% drop in funding, while Massachusetts experienced a 96% increase due to mega-rounds.

Europe

• Funding: Europe raised $2.3B across 468 deals, a 3% decline from Q2 2016.
• Deal Count: Europe saw an increase in deal activity, surpassing Asia.
• Seed Deals: Seed-stage deal share reached 48%, indicating continued early-stage interest.
• Early-Stage Deals: Median early-stage deal size dropped to $1.5M, down from $2.3M in Q3 2015.
• UK Performance: UK funding rose to $834M across 110 deals, reversing declines since Q4 2015.
• Germany: Funded $509M, a 3% increase from the previous quarter.

Asia

• Funding: Asia saw a 3% decline to $7.2B, with 323 deals.
• Deal Count: Asia experienced a 5% drop in deal numbers, continuing a slowdown.
• Seed Deals: Seed deal share dropped sharply to 29%, down from 40% in Q2 2016.
• Late-Stage Deals: Median late-stage deal size fell to $30M, a 70% decline from the previous quarter and 80% from Q4 2015.
• Corporate Involvement: Corporates and CVCs accounted for 45% of all Asian deals, showing strong interest in the region.

Key Sectors

Internet and Mobile

• Continued to dominate with 66% of all VC-backed deals.
• Non-internet/mobile software deal share increased slightly to 5%.

Technology

• Tech companies accounted for 77% to 79% of all deals globally over the past 5 quarters.
• Healthcare was the second-largest sector at 12% in Q1 2016.

Cybersecurity

• Top Deals: Darktrace ($65M), Druva ($51M), Silent Circle ($50M).
• Top Countries: United States (44 deals, $605.1M), Israel (7 deals, $87M).
• Investment Focus: Cybersecurity is a growing concern across industries, with increasing threats from organized crime, nation-states, and cyber-terrorists.
• Corporate Interest: Corporates are investing more in cybersecurity startups to enhance their defenses and integrate new technologies.
• Trends: VC funding in cybersecurity reached $1.6B in the first two quarters of 2016, despite a slowdown due to corporate fatigue and strategic evaluation.

Digital Health

• Top Deals: Meet You ($151M), ClearCare ($60M), Accolade ($55M).
• Top Countries: United States (60 deals, $518.9M), United Kingdom (4 deals, $13.4M).

Auto Tech

• Top Deals: Quanergy ($90M), MetroMile ($50M), Aperia Technologies ($15.6M).
• Top Countries: United States (8 deals, $165.7M).

Outlook and Strategic Considerations

• IPO Exits: Renewed interest in IPO exits, spurred by Twilio's successful Q2 2016 IPO, with Apptio and Trade Desk also launching IPOs in Q3. More exits are expected in Q4 2016 and Q1 2017.
• Market Stability: While the VC market hit an 8-quarter low, signs of stabilization are emerging, especially in the US, where the presidential election and interest rate decisions may signal a turning point.
• Corporate VC: Corporate VC participation reached a 5-quarter high at 28%, showing increased interest in startups and innovation.
• Brexit Impact: Despite uncertainty, the UK and Europe are not seeing drastic changes in investment strategies, and the decline in the pound may be seen as an opportunity for international investors.

Conclusion

The Q3 2016 VC market showed a decline in funding but stabilized deal activity. Investors are becoming more discerning, with a focus on realistic valuations and strategic investments. Cybersecurity and digital health are among the top sectors attracting VC attention, with corporate investment playing a growing role. The report suggests that while the market may not rebound in Q4 2016, it is poised for growth in the new year.