Drop in Venture Capital Funding Shows Caution Growing

Following the money, not the vaporware. JL

Leslie Hook reports in the Financial Times:

Venture capital investment in US tech start-ups fell by a third in the fourth quarter. The drop was most pronounced in semiconductors and business services, which fell by 60 per cent and 75 per cent respectively. Other sectors boomed, with funds invested in financial services nearly tripling compared with 2014. Investment in life sciences deals was up 12 per cent year-on-year.
Venture capital investment in US tech start-ups fell by a third in the fourth quarter to $11.3bn, signalling growing caution after a year in which it hit levels not seen since the dotcom bubble. For full-year 2015, venture investment was $59bn, its highest level since 2000, according to the a report by PwC and the National Venture Capital Association, based on data from Thomson Reuters.The figures come a time when investors are increasingly concerned about cooling valuations for Silicon Valley start-ups, many of which put more emphasis on growth than on profits.

The valuations of groups including Snapchat and Dropbox have been marked down by some of their mutual fund investors, underlining the change in sentiment.

Also denting confidence was the initial public offering of Square, which went public in November at a share price far below the valuation it garnered on private markets.

The drop in venture capital investment in the fourth quarter was most pronounced in sectors such as semiconductors and business services, which fell by 60 per cent and 75 per cent respectively.
However, other sectors boomed over the full year, with funds invested in financial services nearly tripling compared with 2014. Investment in the health sector increased, with life sciences deals up 12 per cent year-on-year in dollar terms in 2015, on roughly the same number of deals.
Investors in the health sector said deal activity could cool in the year ahead as the industry digests the huge investments of 2015.
“We expect 2016 may not be as large in terms of the number of companies funded,” said Ann Lamont, managing partner at Oak HC/FT, a venture capital fund focused on healthcare and fintech. “In part this is because so many companies have been created, people are going to be focused on managing and funding [those] companies.”

The groups that received the biggest investments during the fourth quarter were secretive artificial intelligence company Palantir, which raised $430m, and shopping start-up Jet.com, which raised $350m.

However, some mega-fundraising rounds that began in the year’s final quarter were excluded from the data because they were not formally closed by the year end. Uber is in the process of raising $2.1bn while Lyft closed a $1bn fundraising round last week, as both spend heavily to gain share in the online ride-hailing market.