Cautious optimism dominates venture capitalism this year

Evolution, not revolution: That’s the theme that emerges from data on 2016 venture capital investing as companies that found innovative ways to nudge existing industries forward received big funding rounds.

Solar Mosaic Inc., for example, provides loans for homeowners who want to install and eventually own solar panels. The industry, still a very new one in the United States, where Mosaic is based, traditionally relied on leasing arrangements that allowed homeowners to rent solar power. It’s an incremental change, but one that caught the eye of private equity firm Warburg Pincus, which led a $220 million investment in Mosaic in August.

Similarly, Metromile, which sells car insurance based on the distance driven, raised $50 million in the third quarter. In Australia, OpenAgent, which helps home sellers find and compare real estate agents, raised $9.3 million in the third quarter.

Investments down for the quarter but likely to rebound

The caution showed up in the overall numbers, too. In the third quarter of 2016, venture capital funding fell to $24.1 billion, the lowest since the same period in 2014, according to the Venture Pulse Report from KPMG and CB Insights.

Even so, KPMG and CB experts see reasons to hope that these lows will not last.

…”there are positive signs that the market is becoming more stable, including renewed interest in IPO exits during the quarter,” the KPMG report says. “With the U.S. interest rates expected to rise in Q4 and the outcome of the U.S. presidential election to be decided shortly, the VC market may have reached a critical turning point. Given the high degree of liquidity and a growing sense of positivity taking hold among companies and investors, the VC market is poised to make a rebound – if not in Q4’16, then headed into the new year.”

A successful initial public offering by cloud communications firm Twilio reignited the IPO market in June. IPOs from The Trade Desk, which provides technology that allows ad buyers to manage digital campaigns, and Apptio, which helps Chief Information Officers track and analyse technology investments, followed. Even Europe, where the IPO market is sluggish relative to North America, saw successful offerings from Takeaway.com, a Dutch food delivery company, and Nets A/S, a payments firm based in Copenhagen.

What to watch in 2017

Heading into 2017, fintech investors will focus on two highly anticipated IPOs. Ant Financial, the parent of China payment giant Alipay, is expected to go public, as is Ppdai.com, a Chinese peer-to-peer lender.

Sam Maule of NTT Data Consulting told Bank Innovation that investments in payment and lending fintech companies are fairly saturated.

“We are evolved further into the hype curve in these areas and investors are focused on the return on their investments,” he says. “I believe we will continue to see other areas continue to grow from a funding level both from VCs and banks in 2017, specifically insurtech and regtech. Both of these areas present cost saving and back office solutions specifically for banks and are therefore attractive.”

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