If you run a startup and have been wondering why you haven't been able to land a sizable investment, you're not alone. According to Crunchbase's 2016 Global Innovation Investment Report, U.S. venture investments were projected to fall by eleven percent in 2016, from $86 billion in 2015 to $76 billion in 2016.
While plenty of investments were still made, it's the first year-over-year decline since 2012, says Gene Teare, Crunchbase's head of content. There are two possible reasons for the pullback: nervousness about the January 2016 equity market decline and worries around overvaluation of unicorn companies. “There was a resettling of values in the public markets and there was a similar reaction in the VC community around some of their companies," she says. “That made people concerned about liquidity."
The market also needed to take a breather, according to Teare. After years of strong growth, the industry had to “settle," she says. This pause hasn't just impacted investments. Two years ago, a private unicorn was created almost every three days. In 2016, there were only 40 companies with disclosed or reported first-time valuations of at least $1 billion. The number of U.S. seed rounds was also down 25 percent, while the number of angel seed rounds fell to its lowest point since 2012.
Interestingly, seed deals got larger–the average reported angel-seed investment climbed by 30 percent in 2016 to $900,000–but volume dropped by fifteen percent in the fourth quarter of 2016. This indicates that while there are still people investing, they're focusing more narrowly on their interests. In other words, fewer companies are getting more money. “There is more concentration in the market," says Teare.
Strong Global Growth
It's a different story globally, where total VC investment was expected to increase ninteen percent year-over-year in 2016 to about $176 billion. That's the highest annual total over the past five years, according to the Crunchbase report. The reason why global investment did well is that it's coming off a lower base than investments in America, says Teare. China and India, the two biggest markets for non-U.S. dollars, are only ramping up spending now, while America's sector is more mature.
In addition, Silicon Valley only accounts for seventeen percent of all investments, which means there's a big world out there for VC companies. In China alone, about ten companies were valued at $1 billion or more in 2016. As emerging market countries grow, more companies will pop up, and American investors are looking beyond America's borders for opportunities. Crunchbase reports that two of the best-known Silicon Valley firms, Sequoia Capital and Accel Partners, are allocating a growing portion of their investments to non-U.S. firms, and both are heavily focused on China.
Transportation Leads the Way
As for areas of investment, the hottest market in 2016 was transportation—specifically self-driving cars—with logistics, automotive e-commerce, and ride-hailing companies also seeing strong inflows. Overall, investors put more than $16 billion into transportation-related deals globally, which is 75 percent more than was invested in 2015. Currently, the highest-valued transportation company is Uber, at $62 billion.
Artificial intelligence (AI) also did well in 2016, with more than $1.4 billion flowing into the sector, up from about $900 million in 2015. “Venture investors are increasingly backing companies developing solutions that employ artificial intelligence and machine learning," writes Crunchbase in its report. “Additionally, VCs are finding much to like in the AI-enabled device market, as consumers and enterprises alike yearn for technologies that can teach themselves to work more effectively over time."
Two once-hot areas that saw declines were fintech and security, which saw investments drop by about eighteen percent and 19 percent, respectively, in 2016. Part of the decline was due to the fact these were both strong sectors in 2015, and investors often follow the hot trend, says Teare. “There are sectors that come alive and sectors that become less hot," she says. “You see that a lot within the VC space."
More of the Same in 2017
It's likely 2017 will be similar to last year, says Teare, with muted growth in the U.S. investment space. She doesn't think the industry will hit 2015's peak again anytime soon. However, initial public offerings, which were down year-over-year, should pick up again. Snap, the makers of Snapchat, has said it's going to IPO this year, while other companies like Spotify, Dropbox and Uber could go public as well.
Globally, VC investments should continue to grow as more companies look to China, India and the U.K., which has a budding start-up scene, says Teare. She adds that several non-U.S. VCs are also looking at American companies, so offshore investments could flow both ways. AI should also continue seeing inflows, since it's one sector with a lot of long-term promise. Workplace collaboration technology, such as Slack and other similar tools, could be the surprise sector of the year, she says.
Of course, it's anyone's guess as to what exactly will happen, but it should be an interesting year nonetheless, says Teare. "I don't see big ups and downs, but I don't see a big pull back either," she says. "It's going to be interesting to see what happens."
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