Why VC Funding Isnt Slowing Down (Yet)

The long-forecast slowdown in VC funding isn’t starting yet. Venture capital

investors and startups both expect funding levels to drop, with the phrase

‘winter is coming’ gaining traction as a means of expressing the need for

companies to start stockpiling cash in the face of tougher market conditions.

However, despite a 42% drop in VC funding in December 2015, last month saw

levels not just return to normal, but rocket up almost 250% month on month to

reach USD11.7bn.

January Deal Book – Global Investment Rockets 244% For Strong Start To


This wasn’t just the result of some massive Chinese deals, such as Meituan-Dianping’s USD3.3bn record breaking round for a venturebacked

company. This happened everywhere. Investment in Israeli companies grew 389% to USD295m, UK firms took USD214.9m, up

183% from December and in the US funding jumped 25% to USD2.5bn.

Despite turmoil on global public markets new funds are still optimistic about investment opportunity both in the US and Europe. Index

Ventures and Swedish VC Creandum are launching new funds in the expectation that Europe will not feel the same effect of any market and

valuation fluctuations as the US.

However, while January saw funding levels reach a new high for recent years, VCs are still expecting a correction in valuation and while that

can reduce the value of portfolios, it makes an attractive market for deal


“Many new funds have been raised in 2015 and after slow investment pace in the second half of the year many of them have finally decided

to pull the trigger,” says Target Global partner Alex Frolov. “Current conditions have actually created an opportunity to get into the great high

growing companies at more attractive terms.”

Long-Term Bets

Venture capitalists do not just react to trends and write checks for companies because of the industry they are operating in, but the

businesses’ potential and, more than anything else, the team.

Ask any VC what the most important thing they look for in a startup is and the most common answer is the team. Good founders and teams

might not find success with their first startup, but some of the most successful startups are the second, third or fourth attempt by an


The length of a VC fund cycle is often between five and 10 years meaning investors are not looking for quick returns from exits or IPOs. This

means that early-stage investing is not being impacted by funding slowdowns or public market fluctuations.

“For most of our early-stage entrepreneurs an exit via the IPO markets isn’t that relevant. From the stage we typically back companies an

IPO is a long distance away anyway,” says Uwe Horstmann, co-founder and managing director at Project A Ventures. “For us, turbulent

public markets aren’t driving the investment decisions we take, great entrepreneurs thrive in any environment.”

Impact Of The Public Markets

Globally the public markets are causing concern. Plummeting oil prices are damaging the global economy and the price of gold is rising, as

people like to stockpile it when things look bleak. Some are now forecasting another crunch like that of 2008 on the horizon. However, VCs

are not expecting this to drive change in tech investment yet with Frolov saying: “As long as the public markets don’t collapse, making any

IPOs or acquisitions hardly possible, I don’t think investors would substantially change their activity.”

However, the poor performance of tech stocks is exacerbating the trend of high-valued companies, such as Uber, Airbnb or Snapchat

eschewing IPOs in favour of large, late-stage funding rounds. It’s this higher end of the market where many expect a ‘correction’ in

valuations and Frolov says: “Growth capital might be equally abundant, but they are placing high valuations more cautiously.”

There are some signs of this emerging. Rumours have circulated around food-delivery startup DoorDash, which hoped to raise a USD110m

round at a USD1bn valuation. However, even with experienced investors like Sequoia Capital and Khosla Ventures on board the firm is

expected to close the round at USD700m, missing out on its billion-dollar status symbol.

Europe Vs The US

This does not seem to be impacting Europe yet, where about 10 new unicorn companies with USD1bn+ valuations were created last year, to

the same extent that it is impacting the US market.

“In Europe, valuations have been on the rise, but overall they have been much less dramatic than in the US,” says Horstmann. “Valuations

are currently fuelled by high quality entrepreneurs meeting more available capital and improving exit expectations. If a correction will come,

we don’t expect it to be a major crash in valuations and activity.”

However, boh VCs suggest that a slowdown is still on the cards. Frolov says: “Among the investors in the Bay area and in Europe that we

talk to, we see a common understanding that something has changed, compared to 2014 or the first half of 2015”. But not necessarily in a

way that is as damaging to the ecosystem as some expected. Horstmann says: “I don’t see a major downswing in investment activity

happening in the near future.”

In January investors managed to close lots of deals at terms they viewed as favourable, but negotiations had obviously begun month before.

As 2016 progresses caution is still the word du jour.