2016 is finally over (Thank god!). It was a strange year for some of us who saw the unthinkable happen. It was a strange year for VC too if compared with the flamboyant 2015. Here are the key insights of last year VC activity (via Venture Pulse Q4 2016).
- Uncertanties held back global VC funding and activity: Both VC deal activity and total funding decreased in 2016 compared to 2015. Global venture capital activity (the number of deals) declined by 24%, and total funding ($) also declined by 9%. This was a consequence of two main phenomena: the sociopolitical and economic uncertainties of last year events (Brexit, US presidential election, etc.), and the IPOs of some VC-backed companies that failed to keep private valuations in the public market. Under these circumstances, investors became more selective and thoughtful about their investments.
- Investors changed focus from growth to profitability: The days of startups burning lots of cash are over. In the last two quarters of 2016 the hype of VC in 2015 finished. Now, the new normal is cautious investors. In the last half of 2016 investors preferred startups with efficient operating structure, strong business models and a clear path to profitability. Not only that, investors also requested greater protections in case of down rounds or companies going bust. Convertible debt and other financial structures were utilized more frequently by investors.
- Although investors were cautious, they were willing to pay up for the right opportunities.Valuations and median deal sizes reminded high across all early stage rounds throughout all 2016. This reflected an interesting behavior of investors: they might have taken longer to give a term-sheet, but when they did they followed the standard pricing of early 2016. That allowed the good startups to survive. Only in late-stages (series D) there was a decrease in the median deal size probably because companies in this stage (ready for public offering) were the ones who struggled the must at the beginning of the year.
- CVCs did not hold back as other investors: Even in a market dominated by caution overall, CVCs continued to participate in VC deals optimistically. This is because normally CVCs have different KPIs to those of traditional VCs, PE or other investors. In 2016 CVC participation in VC deals achieved its highest since 2010 accounting for 15% ($64.9 bn) of the total VC funding.
- The number of angel and seed rounds decreased: Compared with the three previous years, the number of deals on these stages was lower in 2016. This was likely because investors wanted to diminish their risks under such uncertain scenario.
- Software remained the strongest sector: The outsized proportion of funding going into software companies in 2016 shows the reach of software in different industries. Investors were also interested in health tech startups and probably will continue to be in the next years as most developed countries are seeing aging of their population.
- The VC market struggled for exits: Exits from VC-backed companies declined compared to 2015 not only by count (-26%) but also by total value (-13%). The reason behind was that few IPOs that happened at the begining of 2016 kept the private valuation of startups; therefore, entrepreneurs were reluctant to file for IPOs as exit strategy and see their valuations down. Corporate M&A were the most common exit strategy, accounting for 84% of the exit value in 2016.
US saw activity and funding dollars fall vs 2015
- The number of deals in 2016 was 20% lower than 2015, and funding went from $79.3 bn in 2015 to only $69.1 bn in 2016. The cooling of the US VC market happened in deals across all stages; however, seed-stage startups were the most affected. Seed startups struggled to find financing as investors wanted to mitigate their risks.
- Unicorns and IPOs were almost non-existent in 2016. For VC-backed companies IPOs, it was the worst year since 2013. The reasons, as mentioned before, were poor IPO results at the beginning of the year and then market skepticism for potential valuations. However, 2017 seems to be a promising year for startups in the public market after Twilio IPO and Snapchat expected IPO (rumor say it could happen this next week). Only some startups transformed into unicorns in comparison to 2015.
The european VC market remained cautious; however, its future looks promising
- Europe experienced a drop in funding (-11%) and deal activity (-28%) vs 2015, as investors in this region became also very selective. However, it was less negative than other regions such as America or Asia.
- Compared to other regions, in 2016, fundraising in Europe peaked. It saw a seven year high in VC money raised.
2017 General Perspectives
- Cautious optimism in the VC market globally.
- IPOs exits expected to open up.
- Investors will keep cautious and will continue to focus on companies with efficient operating structure, strong business model and a defined path to profitability.
- The days of startups being able to burn lots of cash are over. (Take note guys!)
Also published on Medium.