2015 was a banner year for venture capital: investors poured $128.5 billion into ventures, and 71 startups became billion-dollar companies.
But investors are starting to become more cautious with the money they’re pouring into startups.
A new report from CB Insights and KPMG, released Tuesday, examined venture capital activity in 2015 and concluded that although 2015 was a record-breaking year for venture capital, VC funding dropped from $38.6 billion in Q3 2015 to $27.2 billion in Q4.
“The number of deals hit a low not seen since Q1’13,” CB Insights noted in its report.
Here are some of CB Insights’ main takeaways:
- Deal value dropped from $38.6 billion in Q3 2015 to $27.2 billion in Q4.
- Deal volume decreased just as deal value did, too. In Q3 there were 2,008 VC deals; in Q4, there were 1,742.
- The number of mega-rounds is also shrinking. The number of mega-rounds, defined as a $100 million+ investment in a company, dropped from 72 in Q3 to 38 in Q4.
Is this as good as it gets?
Recently, there’s been an increase in chatter among insiders about an impending tech bubble burst. Investors are worried that fast-growing startups have been too reliant on easy venture capital for too long. Their customer acquisition costs are too high, their customer and user growth numbers are increasing because they’re depending on VC funding to help them expand into new markets, and all the while they’re bleeding cash.
In addition, late-stage rounds of funding are getting more difficult to raise without revenue growth and a path to profitability.
Successful VC-backed tech sector IPOs in 2015 were few and far between. Though some companies like Fitbit and Atlassian had above-average IPO performance and were met with enthusiasm in the public market, billion-dollar companies like Square, Box, and Apigee went public with market caps below their last private valuations.
The public markets are much harsher than private markets. This means private investors need to reset their expectations, which could be contributing to a slowdown in funding and downward valuation pressure.
This year, CB Insights predicts investors will be more attuned than ever to companies’ key fundamentals, investing only in companies that have reasonable burn rates and positive cash flows. The VC database also predicts an increase in M&A activity, even as VC activity may be declining.