Research

But the decline should not be concerning to investors or startups because funding levels for VC in 2015 were “irrationally high,” says Anand Sanwal, CEO of CB Insights

By Tessie Sanci |

Global venture capital (VC) funding fell to a two-year low in the third quarter (Q3) of 2016, with US$24.1 billion invested across 1,983 deals, according to a quarterly report published on Thursday by KPMG International and CB Insights.

This is the lowest level of funding since Q3 2014, which saw US$22 billion in VC financing, and a decrease of 14% from funding of US$28.1 billion in Q2 2016.

One reason for the quarter-over-quarter drop in funding was the lack of "decadeals" of US$10 billion or more. Q2 2016 saw this type of financing for companies such as San Francisco-based Uber Technologies Inc. and Snap Inc. of Venice, Calif., which contributed to total global VC funding of US$28.1 billion in that quarter.

North America also saw its VC funding decline, with a drop of 18% to US$14.4 billion in Q3. In Canada, US$358 million was raised in 52 deals in Q3 compared with US$526 million in 67 deals in Q2. Waterloo, Ont.-based Thalmic Labs Inc., which produces wearable technology, received the highest level of VC financing in Canada, with US$120 million.

The declining level of funding should not be concerning to investors or startups, according to Anand Sanwal, CEO of CB Insights.

"Before everyone starts saying the sky is falling, it's worth noting that a bit of sobriety is a good thing … Funding levels [in 2015] were irrationally high with a new unicorn being birthed every third day as investors were keen to force-feed perceived startup winners with cash," he says in a statement.  "That was not sustainable or healthy. We're seeing a reset in deal activity and mega-rounds, but the levels still remain very high relative to historical levels."

One key area that continues to attract attention from investors is cybersecurity, the report finds, as companies in this sector received more than $800 million in funding in Q3.

"Everything is connected these days: mobile devices, automobiles, pacemakers. As networks become more pervasive, companies have to rethink their cybersecurity solutions. That's why VC investment in cybersecurity technologies continues to be high," says Arik Speier, head of technology with KPMG in Israel, in a statement. "Because cybersecurity has been an issue for so long, companies are fatigued. This is where startups matter; they bring fresh ideas and solutions that reflect the shifting complexity of cyber threats."

An area that has seen some growth is the level of corporate investment in VC-backed companies as corporations participated in 28% of global deals in Q3, up from 26% in Q2.

"There continues to be a lot of interest and activity coming from corporates who need to up their game when it comes to innovation, disruption and competition," says Brian Hughes, national co-lead partner of the venture capital practice at KPMG U.S., in a statement. "And it's not just the big tech giants anymore. Heading into Q4 2016 and 2017, we expect to see more game-changing corporate investments in the automotive, health care and [financial technology] sectors."

The full report is available through this link.

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