Third quarter venture capital fundings continued to fall in the third quarter, but there’s a hint of optimism as the year comes to an end and the market for initial public offerings thaws.
According to data from KPMG Enterprise and CB Insights, global financings fell 14% in the third quarter from the previous one to $24.1 billion — the lowest level in two years. But the number of deals edged up quarter-over-quarter, thanks to activity in Europe, to a total of 1,983.
The VC market began showing weakness in the final quarter of 2015, a year that still managed to post record levels of deals. But VCs pulled back as the door for IPO exits slammed shut and investor began worrying that the market was just too frothy. The market has spent much of the past 12 months ‘de-frothing.’ The pace of unicorn creation has slowed notably — in the third quarter only eight were minted.
It’s exciting to be part of a unicorn but necessarily financially rewarding if the company can’t a) support the valuation, and then b) sell shares to the public. And even if a well-funded startup does hit the IPO market, it is not as likely to do well as a less well-funded startup, according to a survey by Founders Collective. Managing Partner Eric Paley says the VC studied 71 IPOs from the last five years to figure out whether companies that were able to raise more money fared better than their competitors. Here’s what they discovered:
This data might suggest that “go big or go home” makes some financial sense, especially for investors. The most heavily funded companies do have larger total dollar returns. Counted together, the 20 best funded companies on the list raised $6.7B in VC and have an aggregate market cap of $62B, for a ~9X return.
The 20 least funded companies on this list only raised $623M in VC, yet managed to return $48B to investors, or an 77X return.
That’s a $14B dollar difference in aggregate returns. That’s non-trivial, especially to VC as an asset class. However, ~$12B of that difference is accounted for by Twitter, who raised a little less than a billion dollars in VC. So aside from those Facebook and Twitter, venture capitalists spent ~$5B to make an incremental $2B.
Now that’s something to think about, especially now that the door for IPOs is opening, with successful pricing of Twilio and other companies. Renaissance Capital reports that at the start of the third quarter, the average IPO price was up 32% and its IPO index had rebounded from its February low an equal amount.
“The VC market may have reached a critical turning point,” the KPMG – CB Insights reports observes. Another net positive: There’s a lot of money on the sidelines waiting to be put to work. “The VC market is poised to make a rebound, if not in Q4 ’16, then headed into the new year.”
Sam Maule of NTT Data Consulting said the benefits will come to fintech, but only to certain segments.”I think this goes back to how you define ‘fintech,'” he said. “The payments and lending segments of the ecosystem are pretty saturated with investors and solutions. We are evolved further into the hype curve in these areas and investors are focused on the return on their investments. I believe we will continue to see other areas continue to grow from a funding level both from VCs and Banks in 2017, specifically insurtech and regtech. Both of these areas present cost saving and back office solutions specifically for banks and are therefore attractive.”
The U.S. looks especially primed for a revival once the presidential election is in the rearview mirror and the likelihood of more rate hikes approaches. Also benefiting the U.S.: Asian investors are investing outside the region more and more. “The Chinese government is also encouraging this outward focus in order to help shift the country from its current manufacturing economy into a more innovation-driven economy,” the report states.
What this means for the fintech market remains unclear. As Bank Innovation previously reported, financings for bitcoin and blockchain startups are on pace to drop for the first time ever. And the lending market is still wary after troubles at Lending Club and On Deck. Insurance-tech is showing signs of life. Just this week, insurance startup Ladder raised $14 million in a Series A round, led by Canaan Partners.
Most of the finance-related IPOs on the calendar in the U.S. are more traditional companies. Overseas, fintech cognoscenti will be watching Ant Financial, parent of Alipay, expected to launch an IPO, possibly next year, in Hong Kong and in an overseas market. Also queuing up an IPO a U.S. IPO is peer-to-peer Chinese lending company Ppdai.com, which may be seeking a $2 billion valuation.
For more on fintech funding, join us in Tel Aviv next week for Bank Innovation Israel. Register here.
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