Venture capital (VC) deal volume continued to fall in Q1 2017 with only 2,716 deals completed globally during the period compared to 3,201 in Q4 2016, according to Venture Pulse Q1 2017 – the quarterly global VC trends report by KPMG Enterprise.
Despite the fourth straight quarter of declining deal activity, VC investment grew to USD26.8 billion in Q1 17. The increase in funding was strongly affected by a resurgence in mega-deals, including Airbnb's USD1 billion+ Series F round, and Grail's USD914 million Series B tranche.
Globally, the Americas led VC investment, accounting for USD17.8 billion. The US made up the lion's share, with USD17.3 billion invested. In Asia, VC investment grew slightly quarter over quarter to USD5.6 billion, while in Europe investment remained relatively flat at USD3.4 billion.
“While VC deal activity in Q1 continued to decline globally, we may have reached a turning point," says Brian Hughes, national co-lead partner, KPMG Venture Capital Practice, and a partner for KPMG in the US. "Market conditions and valuations are stabilising. In addition public markets have been relatively strong and there have been a number of solid tech IPOs late in the quarter that indicate that the IPO market, particularly in the US, is opening. With the amount of dry powder in the market, the likelihood of deals activity accelerating over the remainder of the year is quite high."
VC investment in the US rose quarter over quarter buoyed by a number of USD250 million+ megadeals. Meanwhile, deal activity remained relatively steady quarter over quarter, suggesting that investors remained cautious as Q1 17 brought with it a change in the US administration.
Looking ahead, solid IPOs by Snap – the company behind Snapchat, and software-as-a-service companies MuleSoft and Alteryx suggest the US IPO market may be opening. If this trend continues, there could be a renewal in US-based IPO activity.
In the Americas more broadly, VC investment in Canada was down, likely a result of a natural reversion to the mean following a record 2016. Mexico also experienced a slide as a result of investor anxiety around US trade and immigration policies. Brazil, however, held steady in terms of VC invested, helped by a USD100 million raise by 99Taxis.
Deals activity in Europe slumped to a five-quarter low, leading to a 45 percent drop between Q1 16 and Q1 17. Despite this decline in deal activity, VC investment remained relatively robust in the region, with USD3.4 billion invested – only a marginal decrease compared to Q4 16. Corporates participated in 22 per cent of all venture deals in Europe –the highest percentage seen over the last 7 years.
Investors in Asia remained cautious in Q1 17, with the number of VC deals plunging for the second straight quarter. Despite the declining number of deals, investment in the region grew slightly, helped by six USD250 million+ mega deals. A number of unicorns also appeared during the quarter, with China's Ofo and URWork, as well as Paytm in India, each surpassing the billion dollar valuation mark during Q1 17. Corporate VC continued to be a strong component of VC investment in Asia during the quarter, as more and more traditional corporates recognised the growing imperative to innovate.
Looking ahead to Q2 17 and beyond, investor caution is expected to linger across most regions. However, positive signs indicate that the VC market may be poised for a more substantial rebound as government positions in the US and Europe become clearer.
"2016 was rife with uncertainty," says Arik Speier (pictured), head of technology, KPMG Somekh Chaikin in Israel. "With the new US administration in place and the UK having triggered Article 50 to initiate Brexit, we expect to see more clearly defined government policies in those jurisdictions in the coming year. This, combined with the amount of cash reserves in the market, will likely lead to increasing VC activity over the course of the year."
