As Startup Investments in Decline Worldwide, Global VC Activity Remains Buoyed by Unicorns

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Global deal activity for venture capital-backed startups is on the decline, despite hitting record levels last year.

According to a new report from KPMG International and CB Insights, the total number of deals declined an additional 6% from Q1 2016, after reaching a high in Q2 2015.

It’s a challenging time for VC investors,” said Brian Hughes National Co-Lead Partner, KPMG Venture Capital Practice, and a partner for KPMG in the US. “There’s a lot going on, with uncertainty dominant in every market. Many investors are holding back to see how these uncertainties shake out, while others are focusing on companies they see as having a solid foundation and growth plan.”

Global deal activity fell to 1,886 deals, the lowest volume of deals since Q2 2013 – and down 6 percent from the 2,008 deals seen in Q1 2016. Financing ticked up 3 percent to $27.4 billion, mostly buoyed by $1 billion-plus rounds to “decacorns” such as Uber, Snapchat and Didi Chuxing. Decacorns refer to private investor-backed companies with a private market valuation of greater than $10 billion.

At 7, the number of new VC-backed unicorn companies that were born in Q2 is up from the 5 born in Q1 2016, but still well below the Q3 2015 peak when 25 unicorns were birthed.

“The story of this quarter is the continued decline in deal activity,” said Anand Sanwal, CEO of CB Insights. “Unless you’re 1 of 5 companies for which there is insatiable investor appetite, it is becoming tougher to raise money from VCs and the assorted cast of characters who’ve entered the investment fray, i.e., hedge funds, mutual funds, sovereigns, corporations, etc. Expect to see lots of companies talking about profitability and taking on cost-cutting measures in the coming quarters.”

Large mega-round activity (deals over $100 million) continued to slip, with 35 in Q2 2016 compared to 40 in Q1 2016 and 73 in Q3 2015. Traditional VCs as well as crossover investors such as mutual funds and hedge funds have continued to be more conservative in their commitments to such large deals.

Regionally, North America still leads global venture capital activity by a considerable margin. With $17.1 billion invested in the second quarter of the year, funding rose 10 percent over the $15.5 billion of funding raised in Q1. However, this financing total is skewed heavily by the $5 billion-plus injected into Uber and Snapchat alone. The removal of those outliers shows a very different financing trend.

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