Bloomberg

(Bloomberg) -- While it looks as if funding for startups moved slightly higher in the last four months, there’s a big catch.

According to a new report from KPMG International and CB Insights, global deal activity for venture capital-backed startups continued a decline in the second quarter after hitting record levels one year ago. In fact, at the current rate, deal activity will just barely top 2013’s numbers.

"Many of the high-profile tech [initial public offerings] from 2015 continue to trade well below their initial offering price, putting pressure on private company valuations," said Brian Hughes of KPMG. "This, combined with economic concerns in China and Europe, has continued to put a damper on VC investment."

"It's a challenging time for VC investors," he concluded.

The reason funding moved higher while deal activity dropped is that some larger startups such as those of Snapchat Inc., Didi Chuxing, and Uber Technologies Inc. all saw huge rounds, accounting for much of the funding. In fact, in North America, Uber and Snapchat accounted for more than $4.5 billion of the $17.1 billion in total investment.

"There isn't any reason to expect an uptick in deal activity in the coming quarters, and it is likely that a handful of deals will probably keep funding levels looking OK," said Anand Sanwal, chief executive officer of CB Insights. "To a large extent, those mega-deals serve to hide a bit of the weakness in the markets as they make funding levels look healthy. And right now, there is no catalyst to increase deal activity."

And while there might have been more billion dollar companies minted in the second quarter than in the first, there were yet again more "down events"—companies raising new money or being acquired at a lower valuation—than there were unicorns created. According to the report, seven startups reached the unicorn club in the past four months, but CB Insights’ downround tracker shows that 17 failed to live up to expectations and experienced down events over that time. Unicorn creation saw its most recent peak in the third quarter of last year, when 25 were birthed.

The silver lining to be found is that this year faced a high bar set from the records of 2015, and a pullback shouldn't be all that surprising.

"While the deal levels look poor, especially relative to the ebullience we saw in Q3 2015, if you look at this quarter's numbers against a longer time frame, we're still at very healthy funding and deal levels," Sanwal said. "In other words, the sky is not falling, but the forecast is definitely uncertain."

To contact the author of this story: Julie Verhage in New York at jverhage2@bloomberg.net.

To contact the editor responsible for this story: David Rovella at drovella@bloomberg.net.

©2016 Bloomberg L.P.

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