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Venture capital funding hits a 2-year low

VCs play it safe in 2016. A new report says that could be good for tech.

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A new report shows VCs are hanging on to their dollars.

Richard B. Levine, Corbis via Getty Images

Venture capital funding is at a two-year low. That might be a good thing.

After the heady days of 2015, when a whopping 25 companies were valued at a billion dollars or more between July and September alone, VC financing is resetting the pace, according to Venture Pulse, a report released Thursday. The report was compiled by CB Insights, which watches the VC market, and KPMG International, a consultancy.

Earlier funding levels were "irrationally high," CB Insights CEO Anand Sanwal said in a statement. "That was not sustainable or healthy."

VC-backed companies raised $24.1 billion in the third quarter of 2016, down from the roughly $27 billion-28 billion range the industry has seen since the last quarter of 2015. The third quarter also saw significantly fewer "mega-round deals," epically named financings of more than $100 million.

Caution has prevailed in 2016. Only 8 companies attained values of at least a billion dollars, a status that earns them the nickname unicorns, between July and September.

The market may be stabilizing, the report said. Investors will be happier once the US presidential election is decided. Plus, there's been more of an interest in initial public offering, or IPO, exits in this quarter. Exits are good news for investors. That's when they get their money back.

CB Insights and KPMG expect more corporate investments in automotive, health care and FinTech as companies look to boost their innovation efforts, said Brian Hughes, national co-lead partner of KPMG in the US' venture capital practice, in the report.

One area where investors are definitely interested: cybersecurity. VC investors plunged more than $800 million in funding in the third quarter.

"There's no silver bullet," said Arik Speier, head of technology at KPMG in Israel, in the report, "Just a constant realization that cyber-terrorists will exploit any weakness."