VC activity plunges in final months of 2016

The unsustainable levels of VC investments in 2015 have come down to a more normal level according to the latest VC Pitchbook and MoneyTree reports. Surprisingly – cybersecurity is one of the big losers.

Two major reports on venture capital activity from PricewaterhouseCoopers/CB Insights and the National Venture Capital Association (NVCA) showed a steep drop in US venture capital investments in the last months of 2016 but a strong overall year.

Fourth quarter seed and angel deals fell 43% to their lowest level since 2012. And late stage deals dropped to the lowest level since 2009, according to data from NVCA's Pitchbook.

A rise in exits is essential in attracting further investment capital. However, investments outpaced exits by a multiple of 11.2 - the highest ratio in more than a decade. Exits in 2016 were $47 billion - at 2011/2012 numbers.

However, a more favorable IPO market is expected in 2017 because of well managed and well performing startups lining up for their public debut.

The MoneyTree Report from PricewaterhouseCoopers and CB Insights found that fourth quarter US deals fell 16% in number and 20% in dollars compared with the prior year. The global full year 2016 decline was 10% and 23% respectively.

Artificial Intelligence was the hottest area with $705m funding moving into 71 deals in the fourth quarter.

One of the big funding losers, surprisingly was Cybersecurity startups reported MoneyTree.

After rising into Q3'16, US Cybersecurity funding plunged 51% to $370M. Deals also dropped to 32, down from 40 in the previous quarter.

"For those who predicted 2016 would be the popping of the venture bubble, it was not. Yes, it was a tougher year in terms of deal activity and funding, but versus 2014, which we can call a more normal period, 2016 compares quite favorably," said Anand Sanwal, co-founder and CEO of CB Insights.

Looking forward to 2017, Sanwal expects new big investors from the Middle East and Asia to offset any declines from other investors.

MoneyTree reported that Silicon Valley had a steep drop in new capital investments of 37% and 22% fewer deals compared with the third quarter. New England funding fell 41% in the same period.

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