State of the Markets
THE PAST DECADE AND THE CURRENT STATE OF VENTURE
As we embark upon a new decade, it’s worth looking back over the past ten years to see how far we've come. Coming out of the Global Financial Crisis, fundraising and investment have exceeded prior peaks, and venture has globalized rapidly.
We’re now seeing important shifts in the ecosystem, which have rippled from rising benchmarks and a renewed focus on profitability. Without question, some right-sizing is needed. Fortunately, there is no shortage of strong companies to face these challenges.
A receptive public market has kept the IPO window open, and our outlook on exits remains positive barring a broader economic downturn. Given all of the above, we have reason to be optimistic.
Ending on a High
Many new highs were reached in 2019, as businesses and investors continued to raise and invest capital at a record rate. Flush with cash from high-profile exits and a favorable liquidity backdrop, significant dry powder is ready to be put to work.
Entering the eleventh year in the longest bull market in history and with an election on the horizon, the hundred-billion-dollar question is how close are we to the peak?
Decade in Review
Plenty Left in the Coffers
Starting in 2014, the level of funding and number of funds jumped to new heights — after which the number of funds plateaued, while dollars raised continued to climb. Funds over $1B (“mega funds”) make up only 3% of funds raised, but represented a staggering ~30% of total capital.
Alongside growth in fund sizes, funds are being raised around more specific strategies. For instance, Andreessen Horowitz raised a $300M fund specifically to invest in cryptocurrency and blockchain companies. This follows a multi-year trend towards specialization.
A Decade of Venture
Venture capital investment reached new highs in the 2010s, starting the decade under $50B and ending it at over $250B. As other ecosystems around the world have emerged and grown, the U.S. share of global VC investment has fallen below 50%.
While all regions have experienced massive growth in VC investment, Asian growth has been the most stellar, at around 18x. Growth of emergent ecosystems is partially attributable to the increasing tendency of investors in established regions to look overseas for investment opportunities.
The PIPO Decade
A distinguishing feature of the 2010s was the emergence of the Private IPO (“PIPO”), which is Silicon Valley parlance for a company raising over $100M. PIPO investment increased elevenfold this decade. This injection of capital has allowed companies to stay private longer.
Over the last five years, the ownership percentage received in those deals has gone down, as the competitive environment has driven up valuations and more companies raised a repeat PIPO.
Macro - Tech Dominates 2019
Stellar Year in the Public Markets
Fears of a full-blown trade war, slowing macro-economic conditions, and uncertain monetary policy created an unpredictable environment heading into 2019. Despite this, Tech saw the best full-year performance this decade — returning 48% and 19%, relative to the broader U.S. market. Tech benefitted from warming investor sentiment as the Fed cut rates, the trade war inched towards resolution and healthy fundamentals persisted within the public Tech sector.
Fed Pushes Pause Button on Rates
Convertible debt issuance rose to $53B in 2019 — with Tech driving the lion’s share of issuance. The sudden fall in benchmark rates in Q3 pushed issuers to actively tap the markets — with ~40% of 2019 issuance coming in August and September.
Activity so far in 2020 has been robust as companies look to fix their balance sheets or seek M&A opportunities. However, the Federal Reserve has indicated it plans to keep rates steady through 2020 — which could be an additional headwind as we near an impending election.
Tech Layoffs Tick Up in the Bay Area
After back-to-back years of declining Tech layoffs in the Bay Area, 2019 saw a rapid rise, which occurred primarily in San Francisco.
This dramatic increase was driven by companies like LendingClub, JUUL, Uber and WeWork, laying off more than 1,200 employees collectively. The latter three accounted for ~20% of all 2019 Bay Area Tech layoffs. While this could be a signal companies are looking to right-size their cost structure, 83% of U.S. startups recently surveyed by SVB plan to hire in 2020.
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