With 2018 US VC investment reaching $130.9 billion and fundraising at $55.5 billion, financing in the innovation ecosystem remains strong. What did we learn that may inform what could happen in 2019?
Deal activity is unprecedented, and round sizes are larger than ever. Well-managed companies are being built; they reach beyond just tech and are disrupting entire industries. Those firms now have access to the growth capital needed to reach world scale while remaining in the private markets.
Strong VC fundraising over the past few years, fueled by investor demand for growth assets in an environment of historically low interest rates, has led to war chests of capital. This bodes well for the best performers in innovation.
And, on top of VCs, nontraditional investors, including sovereign wealth and mutual funds, have healthy appetites to continue investing, supporting companies with check sizes once reserved for public companies. If that class of investor remains active, we can expect to see abundant capital available for scaled companies in 2019.
In some sectors, the IPO logjam broke in 2018, and several unicorns (Airbnb, Uber, Lyft, Pinterest, Slack, Palantir) have indicated that they are heading for a 2019 IPO. Do you expect that companies will want to stay private, or will more companies find good reasons to go public in 2019?
The primary reasons to go public remain constant: access to capital, liquidity for shareholders and brand amplification. Companies with the right combination of scale and durable performance will be able to attract public capital. If market conditions hold for valuations, expect one of the biggest harvests to date from the past decade of innovation.
Alternatively, if we see investors switch sentiment from “greed” to “fear,” many of these growth stories that have been priced for future perfection may continue to rely on private capital to avoid pricing in that environment. Companies yet to reach unicorn scale and those that are struggling still need to access capital and the private market is their only real alternative. The good news is the amount of dry powder from VC and PE firms is at a record level to support them.
Looking ahead, how may mega-funds impact investing patterns?
We have already seen their impact, with a record number of $100 million–plus rounds in the private market in 2018. We look at mega-fund investments as strong proof of the enormous opportunities for future innovation and sustainability of the technology and life science companies that are fueling these advancements. Traditional venture firms are also scaling their fundraising, with several $1billion-plus funds raised in 2018. While the majority of $100 million–plus rounds have come from nontraditional investors, traditional VCs are raising capital to maintain ownership as their portfolio companies remain private longer.
If other sources of capital pull back out of fear, it could open an opportunity for mega-funds to help the best performers through turbulent times — and own a significant piece of these prized assets.
Life science and healthcare companies appear to be riding the same wave as tech. What factors are driving their growth?
U.S. healthcare venture fundraising continued very strong in 2018. And it was a banner year for biotech IPO and M&A exits. A swell in biotech deals and round sizes over the past two years highlights the large appetite for venture funding in healthcare, especially among generalist and crossover investors.
These investors are attracted by cutting-edge advancements in technology leading to more effective drugs and personalized treatments. Strong biotech IPO activity looks to continue in 2019 as crossovers replenished their private company pipeline in 2018.
We are deeply committed to serving the life science and healthcare industry and recently closed SVB Financial Group’s acquisition of healthcare investment bank Leerink Partners. The new entity, SVB Leerink, operates as a wholly-owned subsidiary of SVB Financial Group and provides SVB the ability to offer life science and healthcare companies a fully integrated solution for their equity, M&A and debt needs.
Are there fundamental differences between life science and tech prospects for future growth?
Compared with tech IPOs, there is a very different metric; most biotech companies at IPO have no revenues. Instead, they seek IPO proceeds to capitalize additional years of research and development, with the aim of a new drug approval. These funds are also designed to put the biotech company in a better position to land secondary financing down the road or be acquired based on clinical data.
A quick time to M&A exits and high markups via IPOs in biotech in particular are expected to continue driving accelerated fundraising in healthcare.
How should innovation companies respond to global political and market volatility?
Many countries are now managing through unique political and economic disruptions. This turmoil is a challenge for everyone. The good news is that innovation companies are used to dealing with challenges.
They move fast, think big, and find opportunities in all kinds of markets. I don’t expect
this to change. My advice for innovation companies in this environment would be to plan for more scenarios, make sure to have extra capital, be prepared to shift more quickly than usual and work with the best partners that they can.
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