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How is the innovation economy shaping up for 2020?
We have an incredible opportunity in front of us. If a company or industry isn’t innovating today, by almost any definition, it is dying. Every sector is turning to tech to compete and stay relevant. Whether you’re a young startup, a scaling company or a forward-looking investor, this drive to innovate provides sustainable opportunities. In the big picture, this leads to entirely new market opportunities that in turn make the ecosystem more resilient. We can’t ignore the challenges: Massive change will always create winners and losers—and we all need to do a better job of demonstrating how innovation can close, not widen, the divide between haves and have-nots. Disruption, applied thoughtfully, can make people’s lives better.
Do you see any signs of innovation decelerating?
No, for a number of reasons.
First, it’s cheaper. The cost of enabling technologies, including AI, data analytics and storage capacity, continues to drop. The first whole human genome sequencing cost $2.7 billion 15 years ago. Today, the cost is less than $1,000.
Additionally, it’s more inclusive. Knowledge and idea pools are growing with the involvement of nontraditional entrepreneurs, founders and investors—their diverse backgrounds, experiences and geographies are expanding what’s possible. But there is still much work to be done to open tech opportunities to all.
Lastly, innovation makes a positive difference. The tech industry employs more than 11.5 million Americans and contributes $1.6 trillion to the economy. In 2018, it accounted for 261,000 new jobs, and here’s the even better news: Tech jobs grew in 43 states.
How will 2019 record fundraising have an impact on valuations?
In 2019, US VC deal value nearly matched 2018’s record highs, continuing the trend of mega-rounds for large, late-stage companies. US-based venture funds focused on the healthcare sector raised $10.7 billion in 2019, setting a record for the third-consecutive year, according to Silicon Valley Bank’s analysis of PitchBook data. Strong M&A and IPO performances in healthcare have also led to greater returns for LPs, which should in turn drive fundraising and investment levels going into 2020.
Everyone wants a piece of the innovation growth story, from traditional VCs to corporates, emerging managers to mega-funds, sovereign wealth funds to family offices. Aileen Lee coined the term unicorn just six years ago. Historically, the average venture-backed tech company would raise $100 million in total private funding ahead of a $100 million public offering. Today, more than 90% of unicorns have already raised at least $100 million in a single private financing. With all the fundraising and late-stage capital available, we see no signs of things slowing down much, excepting major macroeconomic shifts.
That said, we’ll be watching valuations to see if investors switch their sentiment to “fear.” If so, many of these growth stories that have been priced for perfection will need to continue to rely on private capital—or even face down rounds. However, companies with the right combination of scale and durable performance will be able to attract public capital. Some of the best-known companies were launched in downturns.
What will happen to all the dry powder? When will it get deployed and how?
The good news is the amount of dry powder from VC and PE firms is at a record level to support companies and there is more interest from non-traditional investors, as mentioned above. Looking ahead, we expect VCs to be selective with their investments, completing fewer, but larger rounds.
What will investors want to see in companies going public?
The public markets are increasingly more discerning about the fundamental health of unicorns. Still, for recent IPOs, top-line growth remains highly correlated to a company’s valuation. In fact, the public markets have continued to be receptive to high-growth companies with operating losses. Out of 39 US VC-backed tech IPOs in 2019, seven entered the public markets with a market cap of $10 billion or more on the first day close, compared to just two in the previous three years combined. Post-IPO performance has been mixed (57% of companies are trading above their IPO price.)
Of course, share prices have tumbled for some of these IPOs, an important reminder that that those seeking to go public shouldn’t ignore the importance of demonstrating a clear path to profitability. But I don’t think there will be a complete shift from growth to profitability. At least not yet.
You said there is a need to show how innovation can close the divide between haves and have-nots. Can you elaborate?
Leading with purpose is good for business. It helps us attract and retain great people, clients and partners. Research shows that companies that stand for something larger than their own profits increase shareholder returns. As CEO of a rapidly growing public company that seeks to live its values, I can tell you it’s critical for success and the right thing to do.
We are working with industry organizations, non-profit partners, our clients and our internal teams to find ways to expand opportunity for those who are underrepresented in innovation, including in VC firms, at startups, on company boards, in the executive suite and in entry-level positions. It takes a concerted effort involving the entire ecosystem. Initiatives include looking for startups in untraditional places, changing attitudes and stereotypes and finding new pipelines for talent. As an example, when our clients told us they were having trouble finding employees with the skills they needed to grow, we joined an initiative to create a community-college-based certification program in business analytics, one of the most popular entry-level needs. We’re just at the start, but the early results are encouraging.
How are trade and foreign investment tensions affecting startups?
Technology companies tend to be global from day one. They source from and sell into international markets and increasingly seek foreign investment, so it’s important that we find ways for innovative technology companies to operate and be successful internationally.
We hear from some of our smaller manufacturing clients that tariffs have added to the cost of raw materials, which has an impact on their margins since they often can’t pass the cost on to consumers. Some of our clients have identified silver linings, including one company that is seeing an uptick in its US-based prototyping business as more US-based companies favor a domestic source during uncertainty.
The stricter investment rules handed down by the Committee on Foreign Investment in the US (CFIUS) have had an impact on foreign investment into US-based companies. We are seeing a decline in China’s involvement in US tech venture, but there is still healthy investment in the life sciences and healthcare sectors.
At this point in time, it goes without saying that growing tensions between the US and several Middle Eastern countries could create complications for the global economy.
Where do you see new global opportunities?
Just about anywhere you look. In the past two years, Silicon Valley Bank has launched operations in Canada and expanded our presence in Europe beyond the UK and Ireland to include Germany and, most recently, Denmark. Certainly, we are seeing increased interest by US investors in European companies.
We see major US VC firms setting up posts in places such as Singapore and Mexico City so they can be closer to the markets that interest them. VC investors such as Andreessen Horowitz, Accel and Foundation Capital are collaborating with local VC firms to finance Mexico-based tech companies. In 2019, our global investment team and SVB Capital leaders spent time in Mexico, Brazil and Australia, among other places, to link investors with opportunities in those places.
As in the US, the infusion of new capital and the declining cost to launch a company are driving local entrepreneurship. Increasingly, entrepreneurs in developing markets are moving back home to start businesses after completing their studies at universities and work stints in the US and Europe. More and more, these individuals gain access to mentorship and information through global accelerators and thriving startup communities.