Dive Brief:
- The first quarter of 2016 has seen an ongoing reduction in investments and deals into venture capital-backed companies, according to a new Venture Pulse report from from KPMG International and CB Insights.
- This period saw a total of $25.5 billion invested in 1,829 deals, making Q1 the second quarter straight in which investors have cut back on venture capital funding and activity, the report stated.
- During this time, just five new venture capital-backed startups valued at more than $1 billion were created (the much-desired unicorn status), less than half those during any quarter in 2015. At the same time, there were 19 down events in which companies raised money or were acquired at a lower valuation.
Dive Insight:
Startups have typically been taking lower valuations in the midst of growing skepticism over the mega-rounds throughout most of 2015. Paired with a non-existent IPO market, public market uncertainty, negative press for existing unicorns such Theranos, and other macro-economic concerns, it's little surprise investments are taking a dip as more and more Uber-of-Xs flood the market.
For unicorns, Q1 2016 saw $8.7 billion invested across 37 deals versus $11.5 billion over 40 deals last quarter, the report added.
There are, however, some indications this trend could reverse further into 2016, Bloomberg reported. It noted valuation cuts actually dropped since Q4 2015 (when 25 such events occurred) and added Q1 2016 has been among the best quarters since 2000 for raising venture capital, suggesting those funds are likely to be delployed in later months.
During the recent J.P. Morgan Healthcare Conference, analysts and investors predicted digital health firms would find a bleaker funding landscape in 2016, in part because the field is so young and also because some startups, like telehealth developer Teladoc, that looked like sure winners in the early stages turned out lackluster results when they went public.
Last year, digital health firms raked in $4.5 billion in venture money, a slight increase over 2014’s $4.3 billion total, according to a report by Rock Health. Deal size and the total number of deals were essentially flat from 2014, compared with the 2013 to 2014 cycle when deal volume and deal size grew 56% and 35%, respectively. But overall performance — digital health accounted for 7% of all venture funding — “should calm any concerns of a bubble,” the report says.
However, startups are expected to have to work harder to get those investments. “Prior to this correction, there was a greater willingness to accept lower unit profitability and exchange it for higher growth,” Bloomberg quoted Steve Anastos, associate at Bain Capital Ventures. “I think that willingness to sponsor bad unit economics for the sake of revenue growth has tightened a lot.”