This article first appeared in ANZ’s BlueNotes
Venture capital investment hit a record in 2015. It won’t top that in 2016. The latest EY global venture capital trends report found $US148 billion invested through 8,381 deals in 2015 – the highest venture capital (VC) activity in nearly two decades.
“On a yearly basis, funding grew at 54% while deal volumes rose 10%, reflecting global investor preference for making fewer, bigger bets on established businesses in the later rounds of their fundraising journey and potentially closer to VC nirvana: superior returns,” EY says.
That pace though has slowed noticeably over recent quarters and at the current rate will struggle to reach two-thirds of 2015’s deal volume and value in 2016.
Meanwhile, the latest National Venture Capital Association of America and PwC MoneyTree report, based on Thomson Reuters data, shows $US15.3 billion in venture capital deployed to the US startup ecosystem in the June quarter and $US12.1 billion in the March quarter, again off 2015 highs.
The data – which it should be noted does not exactly correlate with the EY report, a reflection of the difficulty in defining and measuring such investment flows – is revealing two broad trends: VC funding is becoming more focused on more likely returns, and the centre of gravity is dissipating away from Silicon Valley.
But it is also of interest that despite all the noise around financial technology – FinTech – it remains a relatively minor part of the investment universe. There is also indications the maturing of the current cycle of investment in disruption is fragmenting.
“Alternative investors such as hedge and mutual funds who invested heavily in the VC industry across a range of subsectors and helped drive up prices will now be focusing on the growth/ burn ratio and downside protection as we move into an era of price correction and greater competition for cash,” EY says.
Other observers are blunter and argue 2015 was a bubble which is now deflating. Either way, the flood of capital for radical ideas and very early stage pitches, which were getting a hearing even when not brilliantly presented in some cases, are now finding it difficult to even get in front of panels.
That is not to say angel investors and others are not interested in early stage ideas, rather they are not willing to pay the same prices.
Anecdotal evidence and some qualitative research – and it is a theme several contributors to BlueNotes have commented upon recently – reveals that while more startups are looking to partner with traditional businesses like banks and more traditional businesses see such partnerships as valuable catalysts to innovation, other startups are becoming more opposed to joining the establishment.
“When we talk to some entrepreneurs, they actively see themselves as outsiders, as disrupters, it’s almost a matter of faith they will only team up with other startups, other challengers, it’s a really interesting phenomenon,” one field researcher told BlueNotes.
It is also one which is probably more suited to an environment of ready liquidity than one in which the money is sitting with those expecting a return. Or the hated incumbents.
The geographic shift is also interesting. EY believes 2016 will bring more cross-border investment, and China will continue to grow in importance, outstripping Europe but also the US. India remains promising but has not been fulfilling the promise to date.
Even in the US, the indications are similar trends exist. Again, 2015 was a record year with $US60 billion of investment and nearly 4,500 deals but the first quarter of 2016 delivered only $US12 billion spread across 600 odd deals.
In the NVCA data, two things leap out: FinTech is small with financial services well behind software, biotech, computers and peripherals, media and entertainment and even industrials. And Silicon Valley, while still far and away the hotbed, is seeing increasing competition from New England, New York City and the “south-east”.
So a slowing market, tighter funding, more focus on returns – a not dissimilar environment to the one traditional financial services companies are facing.
But for those still carrying a torch for the FinTech revolution, Asia is the most fascinating region as it is for economic optimists more generally – even with the uncertainty around geopolitics and China.
Alive with Activity
The highly regarded financial technology commentator Chris Skinner, on his blog Finanser.com, has published an extremely thorough rundown of FinTech in Asia, and he emphasises the point that, while China has dominated in recent times, and is the home to some of the biggest names, the rest of Asia, from the developed north to the emerging south-east, is alive with activity.
“Asian FinTech is all about new ideas and new models,” Skinner says. “There are incumbent-led changes too – remember Frank from OCBC and Breeze from Standard Chartered? – but it’s not the same as what we see in Europe and the US.
“For example, there is a massive population in Asia that is unbanked, and mobile smartphone developments are creating new models of financial inclusion, especially in the Philippines and Indonesia. Equally, it’s a region that has seen the rise of the new middle class, with millions of consumers gaining disposable income to afford aspirational products and buying much of it online.”
For developed Asia, like Japan, Korea and Taiwan, the promise of FinTech is the erosion of margins in markets long resistant to foreign competition.
The latest data though reminds us venture capital and startup funding are not immune to normal market forces. Whether there was a bubble or not, the appetite for FinTech, in particular, had surged over 2014 and 2015. It is now settling down – as the much deeper market for non-FinTech startups slows as well.
Interestingly, this is occurring at a time when incumbents are becoming less averse to the idea of teaming up with disruptors, whether by partnership, outright purchase or something in between. It will be a period to test the diehard startup revolutionaries who have vowed never to join the ancient regime.