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The venture industry has taken
off since the end of the Great Recession, achieving figures unseen since the
dot-com era. In the past few years, we’ve seen new dynamics take hold: Deal
sizes grew while the number of completed financings declined; valuations rose
as IPOs plummeted; and a variety of nontraditional investors became involved.
We asked Silicon Valley Bank’s President Mike Descheneaux about his
perspectives on the venture industry today and where it’s headed:
What’s your outlook for the venture capital industry?
Interest in the tech sector is strong for investors,
companies and corporates alike, and venture capital remains the go-to source of
funding for growing businesses. VC firms
are bullish on tech, and the favorable fundraising environment is resulting in
new expansion and opportunity funds.
While raising VC funds for seed investing is challenging, there is
plenty of capital for successful late-stage companies. In each of the last four
years, annual U.S. venture fundraising has exceeded $30 billion, and that
figure doesn’t include nontraditional investors such as SoftBank’s Vision Fund.
With excessive dry powder in the ecosystem, companies are choosing to stay
private longer. However, as the pressure
to generate liquidity increases, there could be more M&A activity.
What recent factors or market dynamics have impacted how SVB evaluates,
invests in, or lends to the venture community?
The pace of M&A exits was healthy in 2017. IPOs,
however, were a different story. The growth in IPOs we had expected did not
materialize. Normally, this would put a chilling effect on valuations and the
pace of venture investing in general. Instead, capital continued to be
available for private, late-stage companies throughout 2017, resulting in
valuations at the high end of the private company market that occasionally
outpaced those seen in the public market.
These dynamics impacted the venture debt market, too. With
ample, relatively inexpensive equity financing available to breakout companies
across multiple sectors, coming from less-traditional sources such as mutual
funds, hedge funds, family offices, micro VCs, and initial coin offerings
(ICOs), many companies that would have
otherwise been candidates for venture debt didn’t require this supplemental
financing in order to fund their plan and/or reduce dilution. At the same time, other breakout companies
elected to supplement their equity raise with unprecedented amounts of venture
debt, which compelled us to reevaluate how we think about valuations,
growth rates, burn rates, access to capital and the amount of debt that is
We’ve seen anecdotes around the use of capital call loans by GPs across
private equity and venture capital. What benefits do GPs realize?
While there are differing views on
this subject, capital call lending provides GPs with a tool to fund investments
and/or operating expenses in advance of receiving capital calls from the fund’s
limited partners. VC and PE firms both use this tool, but typically see
different benefits. VCs, focused on operational benefits, are attracted by the
convenience of being able to fund an investment quickly while reducing the
number and frequency of capital calls, but typically do not borrow for long
periods of time before calling capital.
In contrast, PE funds value those same benefits, but tend to borrow for
longer periods of time so as to delay the eventual capital call, thereby
improving fund IRR.
Have you noticed any changes in regional deal flow, specifically new
trends in investment outside of Silicon Valley? If so, what is driving that?
SVB has seen a dramatic
increase in new capital sources and growing tech hubs in places such as Southern
California, New York and London. New domestic capital sources such as family
offices and high-net-worth individuals and new foreign capital sources, mostly from
Asia, are fueling the venture growth in SoCal, New York, Salt Lake City and
Boston, to name some examples. Much like the pattern seen with successful Silicon
Valley-based companies, employees of successful startups in these regions are
leaving to start new ventures. VCs are
also showing greater interest to invest in markets outside of Silicon Valley,
such as Steve Case’s “Rise of the Rest Fund.”
Given the massive rise in fundraising in recent years, what do you
think the future holds?
We expect VC fundraising to remain strong
considering the pace of innovation, growing pervasiveness of technology,
increasing number of viable investment opportunities and the expectation that
more mega funds will be created, such as SoftBank’s Vision Fund. Venture-backed
companies are staying private longer, prompting larger capital investments to
continue to support these companies.