With doom and gloom headlines swirling, it is sometimes difficult to see much beyond the next week or quarter. But this is exactly the time when visionary entrepreneurs and innovative enterprises set themselves apart. While the speeding innovation economy, impacted by overall economic uncertainty, may have hit a slow patch in terms of VC funding, few leaders, if any, are giving up. They may be retooling financing strategies, but they are firmly committed to innovation.
That is what I am hearing from corporate venture leaders and it is the underlying message of Silicon Valley Bank’s Startup Outlook 2016 report, an annual survey of technology and life sciences executives and entrepreneurs on the health of the innovation economy. In late 2015, SVB surveyed more than 900 executives, most of them working primarily in the US, the UK and China. For the first time, the bank surveyed Chinese entrepreneurs.
Venture capital is still go-to funding source: At the end of 2015, survey respondents told us they planned to seek venture capital more than other funding sources when they were ready to raise their next round. About 40% of executives expected venture capital to be their next source of funding, with angel investment a distant second. But securing that VC funding is getting tougher. As a US consumer internet and digital media executive told us: “My sense is that VC fundraising may be more difficult. But I think that good companies will still be able to find funding.”
The SVB report follows on the heels of January’s report by US trade body the National Venture Capital Association. It found that while overall VC activity in the final three months 2015 fell, corporate venture investment remained steady. As a result, 2015 saw the highest level of corporate VC investment since 2000, and totals reached more than double those of 2013.
Startups temper positive outlook: However, the overall innovation economy outlook has shifted to a less positive stance, according to the results of SVB’s seventh annual outlook. Over the past two years, the percentage of US and UK innovation companies that expected business conditions to be better than the previous year has dropped about 20 percentage points. China is new to the survey so we do not have comparable data. Capital is tightening and inflated valuations are declining, prompting companies to adjust to a more balanced funding environment and focus on fundamentals
We see it as a healthy recalibration and a return to a more balanced environment.
Fundraising is difficult regardless of geography: Fundraising is hard everywhere. Entrepreneurs in all three countries said the fundraising environment was challenging. As of December 2015, eight out of 10 executives across the geographic spectrum said the fundraising environment was extremely or somewhat challenging. Raising money is always challenging, and tightening capital requirements often leads to healthier, more sustainable companies.
Chinese startups aiming for IPOs: Of the Chinese startups, 62% said their long-term exit strategy was an initial public offering (IPO), while 5% aspired to be acquired. Startups in the US and UK have a different end goal – 56% of US startups and 59% in the UK said they expected an acquisition, and just 17% in both countries said an IPO. The Chinese innovation funding ecosystem is younger than those in western countries, where IPOs have lost some of their lustre. Also, there are multiple paths to an IPO for Chinese startups.
Entrepreneurs expect the strong M&A market to continue: Whether an IPO or acquisition is their own long-term goal, more than 80% of innovators said the next 12 months would deliver as many or more mergers and acquisitions than 2015. Chinese respondents in particular were more bullish on growing M&A activity than others. Most startups said they expected acquisitions would increase or stay the same in 2016. Many tech IPOs faltered in 2015, making M&A a more viable exit option. Also, reduced valuations make acquisitions more attractive for top acquirers that have plenty of cash on hand to make significant purchases.
Financing and recruiting are global challenges: Of all respondents, 21% said access to financing was their biggest challenge, followed by 17% who chose recruiting and managing talent. In a follow-up question, startups said finding the right talent was difficult no matter where entrepreneurs lived. Across the US, the UK and China, at least 95% of startups said finding workers with the right skills to help their companies grow was a challenge.
Cybersecurity is a top policy concern of startups: Cybersecurity, regulations affecting data security and data breaches ranked as the most important public policy issue in China, second in the US and third in the UK. Access to talent was the top public policy issue for US and UK startups.
Chinese startups have more women in leadership: Chinese startups outpace their US and UK counterparts when it comes to the number of women in leadership positions. Among Chinese startups surveyed, 79% have women in C-level roles, compared with 54% of US startups and 53% in the UK. Other research shows that across all industries women in China in recent years have made impressive gains in reaching C-level positions.
I am always disappointed to see the lack of women in the US and UK startup ecosystems – especially when a First Round Capital study of 300 portfolio companies last year reported that startups with at least one female founder performed better than all-male teams. We must accelerate the pace of recruiting and training more women to fill C-level and board positions in innovation companies. I am delighted to see initiatives like Sukhinder Singh Cassidy’s TheBoardlist. This eight-month old endeavour, of which Silicon Valley Bank is a founding sponsor, hosts a database of female board candidates and recently launched a beta project in Europe with UK participation.
British startups oppose leaving the EU: This finding did not surprise me. Three-quarters of UK startups said that leaving the EU would have a negative effect on their business. That was up from 64% when SVB asked the question a year ago. “Leaving the EU would significantly reduce US investment and jobs in the UK as they transfer their business to other EU countries,” a London hardware executive told SVB.
A recent SVB UK survey found that fintech businesses think Europe holds the key to expansion, which might explain the lack of support for a British exit. One fintech executive warned that “geopolitics can overshadow business matters in Europe”. Just 6% of executives said the impact would be positive.
It is healthy to have discussions around opportunities and challenges in the innovation economy. So let us consider this the start of a dialogue. Follow the conversation on Twitter at @SVB_Financial and @SVB_UK #StartupOutlook.