- Venture capital investment dropped in last year’s final quarter, while the number of deals hit a low not seen since the first quarter of 2013.
- The proliferation of fintech real estate industry startups like Social Finance and Fundrise may dwindle in 2016 as a result of an uncertain global economy.
- A creative product won't be enough for companies seeking venture capital investment this year. They'll need to show how their idea will make money.
Although 2015 was a record-setting year for venture capital (VC), investors are becoming stingier with their funding, according to a recent global analysis by KPMG Enterprise and CB Insights.
And the financial services technology sector, or “fintech,” in particular may suffer from a drop in VC investment, the companies said in their joint report for the fourth quarter, the Venture Pulse Report.
The companies noted that overall VC investment increased by about 44 percent from 2014 to 2015, topping $128 billion worldwide. However, after two strong quarters, VC investment dropped from $38.7 billion in the third quarter to $27.2 billion in the year’s final quarter, while the number of deals hit a low not seen since the first quarter of 2013.
“The drop in VC investment signifies a shift in thinking as global investors seem to be taking a less bullish view of the market,” the companies concluded in their report. “An uncertain global economy, a projected slowdown in China and expected interest rate increases following the recent increase in the U.S. seem to be driving some investors to hold back their investment dollars.
“These trends, along with a number of Q4 2015 IPOs falling short of recent private valuations, appear to be making investors more cautious.”
Future fintech startups and the importance of cash flow
And it’s getting harder to close deals in the fintech sector, which has seen an 8-percent reduction in VC investment each year due to increased competition among banks and insurers, the report said.
This could impact the proliferation of innovative real estate finance startups like Social Finance, or SoFi, which offers jumbo mortgage loans to young professionals, and real estate crowdfunder Fundrise. Both were recently recognized by Forbes Fintech 50 list, a compilation of companies disrupting the finance business.
“During the first three quarters of 2015, there was little divergence in VC investment between companies with positive and negative cash flows,” the report stated. “Looking ahead, we expect to see more divergence and investors focused on investing in companies that have key fundamentals in place — positive cash flows, realistic burn rates and efficient operations.
“At the same time, with the anticipated slowdown and rising interest rates in the U.S., there will likely be an increase in M&A activity, even though VC activity may decline.”
‘More than an innovative product or service’
However, the companies called these results a “blip along a continued mid-term growth of investment into fintech,” although they were unclear about how real estate fintech may fare among other types of subsectors like biometrics and futures.
“In 2016, companies seeking VC investment will need more than an innovative product or service,” said Arik Speier, co-leader of KPMG Enterprise’s Innovative Startups Network and head of technology. “They’ll need a plan to monetize their offerings. That’s because if they don’t know how they’re going to make money, they’ll be hard-pressed to gain attention as the VC environment tightens around the world.”