Investors pumping more funds into a smaller number of startups

12 February 2019

The sums of money flowing from venture investors into startups has reached its highest point in history. According to research from KPMG, a staggering $255 billion was pumped into startups last year, an increase of more than 40% compared to the year previous.

The largest deals were by a distance the investments of $14 billion in Chinese company Ant Financial and $12.8 billion in Juul, an American manufacturer of electric cigarettes. Across the board, key areas of investment included artificial intelligence, autonomous vehicles, ride sharing, healthech, fintech and biotech.

In Europe, total investments increased from $19 billion in 2017 to over $24 billion last year. In spite of Brexit looming around the corner and the growing economic uncertainty on the island, UK-based investors accounted for four of the ten largest investments in Europe - Graphore with $200 million, Nested with $156 million, Moonbug with $145 million and Monzo with $110 million. Other large deals in Europe included HometoGo with $150 million, BlablaCar with $117 million and GC Aesthetics with $97 million.

Similar to other regions, the number of transactions dropped in Europe, from 4,607 in 2017 to 3,380 last year. Globally, the number of deals decreased by more than 2,000 deals to 15,299 in 2018. According to Daniël Horn, a venture capital expert at KPMG in the Netherlands, investors are becoming increasingly selective in their financial choices amid a dropping success rate of startups. “The record level of investments show that venture capitalists are increasingly inclined to support late-stage transactions, startups that are more mature and are looking for expansion into new markets.”Venturing financing in Europe

Corporate venturing

The data from KPMG also shows that venture capital investors are getting more and more competition in their bidding from corporates. The share of corporate venturing – venture capital spending made by the private sector – has risen to almost 20% of the total amount. In comparison, in 2015 this percentage hovered around the 15% mark. Companies in the  financial services, retail, automotive and technology sectors are among the most active acquirers. 

Looking ahead at the current year year, Horn said that while the drop in the number of transactions “is concerning”, at the same time the solid number of good quality and more mature startups continue to attract investments. “We foresee that the number of companies going that will go public will increase significantly this year,” in the footsteps of for instance Uber as Lyft who both announced their IPO last year. 

John Lavender, Global Chairman or KPMG Enterprise, remarked that it is foreseeable that 2019 may not improve upon the results achieved in 2018. “However, there will continue to be a substantial amount of venture capital invested globally, particularly in safe bets and later stage companies. This will likely result in the average deal size continuing to increase while deal volume either remains steady or drops further.”

Related: Startups attract record level of funding from venture capitalists.

Firms struggling with turning M&A deals into equity value

18 April 2019

At a time when merger & acquisition activity is on a high, new research highlights that a majority of deals closed aren’t in fact contributing to equity improvements. 

To come to their conclusion, researchers at Willis Towers Watson and Cass Business School analysed the performance of all deals closed in the first quarter of this year with a deal value of above $100 million. For all those deals, 180 in total, the share price of the acquirer was tracked, and benchmarked against an index (MSCI World Index) which monitors equity performance across 20+ developed countries. 

The analysis found that across all regions globally, deals on average had a negative result on the equity value of the acquiring party. Buyers in North America and Asia-Pacific in particular struggled with value creation from their acquisitions. In the US and Canada, companies that were involved in a takeover or merger had a negative performance of 10.1 percentage points compared to the North American index. Asia Pacific buyers lagged 5.0 percentage points behind their regional index. 

Globally, the average stood at 5.4 percentage points behind the index. “The international M&A market as a whole is showing disappointing results, on the back of a volatile transaction climate and global political uncertainty, from trade wars to increasing protectionism,” said Gabe Langerak, a Dutchman who leads Willis Towers Watson’s Mergers & Acquisitions practice for Western Europe.Firms struggling with turning M&A deals into equity valueEurope however bucks the trend and is the only region where large mergers & acquisitions in the first quarter of 2019 had a positive impact on the stock prices (2.8%). Langerak: “The relatively stable – or less unstable – political and economic situation seems to turn out beneficial, and as a result European companies have outperformed their international peers.” It is not just a short term catch – the continent has been performing better for years, with the three-year average at 5.1% above the index. 

Striking, according to the researchers, is that international deals are outperforming national deals. For example, cross-border transactions score 0.9% higher than the index, while cross-regional deals even surpass the index by 3.1%. 

While the ‘financial’ performance of M&A deals is by no means impressive, there are however little signs of deal activity to slow in 2019. “Growing cash reserves, technological disruption and the stagnating growth of emerging markets are still pushing companies towards the M&A market,” explained Langerak. A recent report by Bain & Company found that global merger and acquisition activity spiked last year, growing from $2.9 trillion in 2017 to $3.4 trillion in 2018

The role of private equity, which accounts for a large share of deal activity, is another force lifting M&A activity. Investors are cash rich, and face pressures to spend the money in order to help their backers (mostly institutional investors and family offices) reap better than market average returns. According to one estimate, private equity now sits on $1.7 trillion of funds that is available but can’t be invested (‘dry powder’), with investors struggling with higher multiple and a limited supply of top, well priced targets. “As potential candidates now seem more expensive than during previous M&A peaks, such as in 1999 and 2008, it is more difficult than ever to close successful deals.” 

Langerak concludes with a tip for deal makers; “For M&A experts that want to make a move, it is key to focus on selecting the right acquisition candidates. Proper preparation, integration and the right people are essential to gain the right insights before taking a leap.”