Market decline hasn't affected AR/VR or ed tech boom

Ronny Kerr · February 12, 2016 · Short URL:

Ironically, moneymaking industries sharing economy and fin tech see big dropoffs

As financial markets continue to struggle, we’re continuing to investigate ways in which that struggle has impacted venture capital investing and the broader startup world.

Looking at data from the fourth quarter of 2015, when the financial decline was well underway, we discovered that a few tech sectors (augmented reality, virtual reality, and education) have actually managed to maintain their momentum while others (financial and sharing economy) suffered slumps.

The global markets have continued their slow, steady decline this week, with the Dow Jones Industrial Average (at 15,732) down 9.8 percent this year and the Nasdaq (at 4,283) down 14.3 percent this year.

Twitter continues to spiral downward after its earnings call revealed that active user growth has stalled: the company’s share price dropped 13.5 percent in the past week to $14.34. For the year, it’s down a whopping 38.3 percent. In the past week, Facebook lost 6.4 percent to $102.31, though it’s only down 2.2 percent for the year.

Apple lost 2.5 percent to $94.02 this week, and for the year it’s down 10.6 percent. Alphabet (Google) appears to be holding steady, in the past week gaining 2.2 percent to $709.40, though it’s still down 8.6 percent for the year.

To give you a sense of how the market turmoil—which began last year—has affected VC investing, we explored the amount of investments in specific sectors to see which were the biggest winners and losers.

AR/VR marches onward

Continuing a trend that started over a year ago, augmented reality and virtual reality have seen total VC funding grow by about $50 million every quarter for the past year, according to data from Digi-Capital. And the market decline did nothing to slow that growth last quarter:

The fourth quarter of 2014 was an anomaly thanks to the $542 million Google-led investment in Magic Leap, which will skew the data once again for this quarter with its $794 million Alibaba-led Series C round.

Overall, the data shows that this is one emerging market with—perhaps—so much growth potential that it can’t be affected by any decline hitting the world’s biggest financial markets.

Education technology booms

Perhaps even more impressive than the gradual, unimpeded growth in AR and VR is the massive boom in VC funding for the education technology space. Here’s the global data on venture capital investments from CB Insights:

The billion-dollar breaking number in the fourth quarter, a 300 percent increase over the quarter previous, was made possible through several VC investments greater than $100 million. A few of the biggest:

  • HotChalk raised $230 million from German media conglomerate Bertelsmann for its online college programs
  • TutorGroup raised a $200 million Series C round for online courses in English for Chinese-speaking students
  • Udacity raised a $105 million Series D (also led by Bertelsmann) for its online courses in coding

Though education has typically been a difficult space for startups due to the monetization challenge, more and more entrepreneurs and investors have been carving out low-cost, high-profit niches for new Web and mobile services to flourish.

Fin tech tanks

The financial technologies space has been fairly strong for over a year, with each quarter typically bringing in over $2 billion in VC funding. The third quarter of 2015 was especially huge, with $4.4 billion brought in, according to CB Insights, but then total funding tanked in the fourth quarter:

“It is no surprise that it has been harder to close deals, however we believe this is only a blip along a continued mid-term growth of investment into fin tech," according to Warren Mead of KPMG UK. “Competition should heighten in 2016, as VC funding, global banks, and insurers are increasing their investment into certain fin tech sub-sectors, such as biometrics and future payments.”

Health care stays the course

With Vator holding its second annual Splash Health event at the Kaiser Center in Oakland on February 23rd, this was one we were specifically curious about. As it turns out, the VC boom in health care has managed to stay its course in spite of the dwindling financial markets:

This data from CB Insights reinforces the idea that health (like education) has long been neglected by technology but will manage to continue pulling in new funds as more companies tackle the massive, as-yet-undisrupted health industry.

Sharing economy slumps

The slice of the technology industry that saw the biggest slump in funding in Q4 2015 also happens to be, bizarrely, the one area raising monstrous billion-dollar rounds repeatedly. Yet, for all the funding going into Uber, Airbnb, and Lyft, this area's VC funding took a nosedive in the fourth quarter of 2015.

Here’s the data from Jeremiah Owyang of Crowd Companies on investments in what he calls the "collaborative economy":

  • Q4 2014 — $4.3 billion
  • Q1 2015 — $3.0 billion
  • Q2 2015 — $3.7 billion
  • Q3 2015 — $5.6 billion
  • Q4 2015 — $1.9 billion

To be fair, it’s difficult to make firm conclusions about the sharing economy since it’s so affected by the heavyweights mentioned above. When they do raise rounds, they tend to be huge enough to tip the scales. And, as we wrote before, Uber, Airbnb, and Lyft valuations have managed to remain immune to market deflation.

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