VC levels will moderate in 2016 as investors switch to a focus on execution

  • Companies in the venture capital (VC) pipeline can expect more scrutiny over their ability to execute
  • More activity anticipated in China this year following seven-fold increase over the last five years

LONDON, 21-Apr-2016 — /EuropaWire/ — 2016 looks set to be the year in which VC levels moderate, as investors switch to a focus on execution. This follows an exceptional 2015, which saw US$148b invested through 8,381 deals – the highest level of VC activity in nearly two decades according to the EY report, Back to reality: EY global venture capital trends 2015. The report suggests that the downward trend seen in 4Q15 is likely to persist through the rest of the year, reflecting a healthy market rebalancing on the back of more careful decision-making.

Bryan Pearce, EY’s Global VC Leader, says:

“In an era of moderate economic growth and perpetually low interest rates, investors will still be as keen to find growth opportunities as investees are to secure funds. The tension between caution and the ongoing quest for return will be finely balanced.”

Year-on-year, funding grew at close to 55% in 2015 while deal volumes rose 10%, reflecting global investor preference for making fewer, bigger bets on established businesses that are in the later rounds of their fundraising journey – 80% of deals and the amounts invested in dollars were in companies operating at the generating revenue stage, while 58% of capital invested was in the later round class. The majority of activity was focused on the first three quarters of the year, falling back in the last quarter with a 12% quarter-on-quarter decline, as concerns around public market conditions, valuations, burn rates and over-funding put the brakes on investment.

Interest will rise in early-stage, lower-cost investments as VC flexes the model

Despite the later round class capturing the majority (58%) of dollars invested in 2015, first-round funding secured the highest volume of deals accounting for 45% of the global deal share. This reflects VC firms’ preference for making a large number of smaller bets on younger start-ups at lower values.

Pearce says: “We expect greater interest in early-stage investing through 2016, in part because of a belief that when these companies mature the capital markets may be more receptive. It is also possible that investment periods will be lengthened as the economy slows as part of a new trend toward what’s been dubbed ‘patient capital.’”

Focus on sectors

Annual funding growth in travel and leisure and consumer information services stood at 126% and 71% respectively in 2015. With US$32.1b in funding, including the top deal of the year (China Internet Plus Holding Ltd.), the consumer information services subsector led the way in terms of amount raised. By contrast, subsectors such as household and office goods and renewable energy were significant fallers, seeing declines of 43% and 15% in funding, respectively.

Pearce says: “Specialization will gain fresh appeal in 2016 as blockbuster deals become harder to execute and investors focus instead on what they know best.”

China rising

With US$72.3b investment through 3,916 deals, the US continued to dominate the global VC landscape in 2015. However, for the first time ever, three of the year’s top five VC deals were outside the US, all of which were in China. VC funding in China has grown seven-fold in the last five years, from US$7b in 2010 to US$49b in 2015. At the same time, deal size has doubled from US$15m in 2010 to US$30m in 2015.

On these statistics, China now accounts for three times more investment than all the countries of Europe put together, raising total funding of US$49b through 1,611 deals in 2015 including several billion dollar plus deals and China Internet Plus Holding Ltd., worth US$3.3b.

Pearce says: “We expect 2016 will be the year of the mature, sophisticated investor, looking to identify stronger long-term bets. If 2016 ends up being a down year on the back of a record US$148b of global investment in 2015, that would not be heart-breaking. In our view, the better deals and their leadership teams will continue to attract traditional VC funding. Corporate venture capital will also remain active. We see intense interest in sourcing disruptive innovation to sustain growth.”

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Notes to Editors

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About the data
All venture capital data in this press release and the EY report Back to reality: EY global venture capital trends 2015 is sourced from Dow Jones VentureSource unless otherwise noted.

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