After robust phase, venture capital heads to pre-recession level
Riding high for over seven years, venture capital (VC) funding is set to slowdown and may be heading towards pre-recession level. With financial markets reeling under pressure, several $1-billion unicorn startups have decided to put their initial public offer (IPO) plans on hold. Venture funding is poised for a challenging phase in 2016.
In a survey carried out by Upfront Ventures, 82 percent of venture capitalists commonly used the words 'caution' or 'concern,' while sharing their views about the prevailing market conditions. Analysts opine that now, there's clear shift over to fear from greed. The era of floating new companies has gone, says Mark Suster, Upfront partner.
Business Insider reports that the number of funds closed in 2015 was 235 down from 271 in 2014. The venture capital raised during 2015 was $28 billion as against the $31 billion in 2014. The ongoing investment trend clearly indicates that the venture capital-backed startups flourished for over seven years and it's no longer continuing further.
With more money venture financing increasing, 2015 was year of pre-recessionary and it'll further continue through 2016, opine analysts. Angel and seed deals grew at the fastest level, but most of the investment was in later stage funding. Moreover, these later stage investments were also largely contributed by non-traditional VCs accounting for 50 percent during the past three years.
However, the confidence among venture capitalists unfazed with the changing situation. The University of San Francisco said that the business confidence among Bay Area VCs was at 3.59 on a scale of 1 to 5 for the fourth quarter of 2015. Though business confidence level improved, it's still below the 12-year average of 3.72, as reported by CNBC.
The gap between VC fund raised and VC fund invested is widening indicating pre-recessionary sign. For instance, during 2006-07, venture capitalists raised $61 billion and invested $63 billion. But, in 2014-15, VC fund raising was $59 billion and VC investment was $145 billion. The fund raising by Venture capitalists is declining.
National Venture Capital Association's data reveals further that venture capital firms raised less money and invested in a limited manner. The declining of VC investment from 2014 indicates tightening of funding market in 2015. The funding for technology startups is slowing down in 2016 and it's hitting VCs.
Industry observers feel that there's not much to worry about the VC funding. According to a report published by Fortune, majority of VC firms are in favor of continuing their investment at the same pace as it was recently. Eight percent of the respondents in a survey said they would increase investment. Adding to this, Chinese money is looking for stability. Analysts foresee there's possibility of brand new money enters the system.
Upfront survey further reveals that the pace of mergers and acquisitions (M&As) couldn't match the increase in funding. Hence, though venture capital mark-up was good, but cash distribution is comparatively less. Similarly, IPO exits were eased by 30 percent in volume and 38 percent in value. Venture capital-backed IPOs were 66 with capital raising of $6 billion in 2015 as against the 107 IPOs with $9 billion capital mobilization in 2014.