Softness in U.S. Venture Capital Continues in Q3'16: KPMG Report

Funding in the U.S. dropped 18 percent from Q2'16 to $14B following a nominal uptick the previous quarter. Deal volume also declined from the previous quarter by two percent to 1,067 deals. This activity reflects overall uncertainty in the market around the U.S. presidential election and potential increases in the U.S. interest rate.

"I think many investors are waiting for the uncertainty around the U.S. election and the interest rate increase to pass, hoping the U.S. economic picture will become more clear," said Brian Hughes, National Co-Lead Partner, KPMG LLP's Venture Capital Practice. "Despite the lackluster Q3'16 results, IPO exits like Apptio and Trade Desk indicate that IPO optimism is set to rise into 2017."

To read the full Venture Pulse Q3'16 report, visit http://bit.ly/1kjiM41.

Internet companies led other industries in Q3'16 with a 49 percent share of the deals this quarter. Healthcare deals increased to 14 percent, from 12 percent the previous quarter. Additionally, deals in the mobile and telecommunications space have dropped to 12 percent, a five quarter low.

Although the share of seed deals has declined to just 26 percent in Q3'16, it continues to represent the largest share followed by Series A (23 percent). Investors' focus on either early- or late- stage deals may be evidence that VC investors are looking more closely for investments in companies with sound business plans that can actually achieve funding targets. This ongoing "barbell effect" on funding is expected to continue.

"Today's investors are more cautious than they have been in the recent past, focusing more on a clear path to profitability as opposed to hyper revenue growth. Significant premiums are being placed on optimizing unit economics," said Conor Moore, National Co-Lead Partner, KPMG LLP's Venture Capital Practice. "While this shift in focus may lead to fewer deals and longer time lines, the companies who best address these items will still obtain high valuations."

Additional findings:

• Early-stage median deal size held steady at $3M, up 36 percent from Q3'15.
• Late-stage deal size is down 34 percent year-over-year to $22.4M.
• The 10 largest rounds in North America, including Uber, AirBnb, Mosaic, Fresh Direct, and others, totaled more than $3.4B for Q3'16.
• 53 percent of all VCs investing in the U.S. were based in California, New York, or Massachusetts.
• Deal volumes in California and New York both fell by 27 and 26 percent respectively from Q3 15; Massachusetts deals increased by 8 percent from Q2'16.
• Corporates represented 26 percent of all VC investment, which is on par with previous quarters.

About KPMG International
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 155 countries and have more than 162,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.

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SOURCE KPMG International