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Global Funding Activity Shift: Early Warning Signs for Silicon Valley?

Is Silicon Valley’s and the San Francisco Bay Area software industry becoming less important to investors?  Are there warning signs for economists and investors in the trends emerging this year?  Perhaps.  Over the next few posts we will detail a remarkable shift in investment activity globally, and within the United States.  As in everything there is good news and bad news in the data, depending on the industry you are in, and where you are located.

We want your feedback and insights on the data we are sharing.

In last week’s post: Surprising Investment Trends & Insights, we noted that in the last four months there has been more investment activity in Canada than in all of 2015.  We also noted a number of other trends that are noteworthy, and wanted to share.

Starting with a breakdown of activity by deal round, we see a very natural distribution in overall activity, with early stage rounds dominating.  Thinking of financing activity as a pyramid, we should see the largest number of deals announced across the combined Seed, Angel, and Crowdfunding rounds.  In declining volume, the trends flow to A B C and later.  The trends confirm expectations, and it would be surprising to see otherwise.

However, when we look at activity spread across the globe, the first interesting shift is emerging.  Europe is trending up in acquiring a greater percentage of deals.

If we map the increase in activity with Brexit and the general European economic upheaval, deals there look cheap in comparison to historical trends. Foreign investors look to that market, and see opportunity; a new form of “buy low.”

This trend is confirmed when we look at dollars invested by region.  Again Europe is trending up.  The loser: Asian companies.

This matters for a huge number of reasons.  Overall U.S. Activity is stable, the trend is flat, but over the period to date, while the number of investments in Asian companies is stable, the amount per deal is declining. Conversely, Europe is seeing more, and larger deals.

As a result of European political uncertainty, caused by Brexit, massive migration, and a variety of other issues, European companies are in an advantageous position because they are currently able to make investment dollars go further.  Costs are lower relative to others than they were at the start of the year.  This is an absolute relationship based purely on exchange rates, but savvy investors appear to be taking up the opportunity.

Now for the stunner:   The amount of deals going to the software sector worldwide is in serious decline.  The trend is unmistakeable.  Software funding activity tends to be focused on Silicon Valley and the SF Bay Area.  As a sector, activity is down 50% during the reported period.  This represents a massive shift in market interest.

This shift is not just in the percentage of deals, but also in the dollars invested worldwide by sector.  While the amount of  venture capital investment placed in the software sector is up in real dollars invested during the reporting period, it is no longer the sector receiving the majority of investment activity nor dollars.  The average dollars invested per deal is higher however.  We’ll get into why, and how in a future post.

We do see a huge spike in the amount invested in Mobile technologies in June, but that is an outlier, not reflected in the number of deals.  In contrast, the global investment activity in the healthcare sector is marked by an increase in activity, but less dollars per deal.

So what are the takeaway trends from this post, and last week’s?

  1.  Investment activity post the late-2015 meltdown has shifted.
  2. Activity and amounts invested in Europe are up significantly, and with favorable exchange rates, we do not expect to see this shift in the near term.
  3. Investment in Canada is up, despite a less favorable exchange rate, but likely due to Canada representing one of the most stable economic and political markets globally.
  4. Investment interest, and what’s hot across the global investment market has shifted considerably.
    1. How will this affect companies seeing new capital? We’ll develop that next week.
  5. Investment activity in the US is trending very differently from the rest of the world.
    1. We will explore how in next week’s post.

What does the various shifts mean for the U.S’s position as a leader in global innovation?  We’re interested in your perspective.

If European investment continues to rise, what does this mean in 5 and 10 years time?  It needs to be noted that compared to the rest of the world, there is not a lot of direct government involvement in supporting small business R&D in the USA.  Therefore, with the added investments, real R&D investment that supports long term innovative technology growth in markets outside the US is likely to be much stronger.

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