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.
Private Markets - Higher Benchmarks
Seed & Series B Companies Clear Higher Hurdles
Much is said of rising benchmarks across funding rounds. In terms of revenue run rates, it seems to hold true at certain stages more than others. Seed and Series B appear to have rising bars. Increasing deal sizes also play a role as they allow companies to scale faster.
The average company age has gone up for Series A and B and, to a lesser degree, Series C. This speaks to the higher benchmarks at the early-stage and the longer time it takes a startup to reach them.
Fewer Down Rounds, More Inside Rounds
Early-stage companies are increasingly likely to raise money from an existing investor, or a syndicate led by one. This may be a result of the growth in opportunity funds raised by major VC firms around the strategy of doubling down on existing investments or, more bearishly, increased scarcity of outside capital. Almost 45% of founders recently surveyed by SVB say the fundraising environment is getting harder.
There has been a concurrent drop in rounds with a valuation write-down.
PIPO Activity Slows as Repeats Take More Share
Closing a decade marked by historic flows of capital into large growth rounds, PIPO activity appears to have just had its slowest quarter since 2017. Large deals in 2018 included a $500M+ raise by Peloton and $1B+ raises by Uber and Lyft, all of which have since exited.
As large unicorns have exited the private markets, the size of companies raising a PIPO has become smaller. Growth in the share of repeat PIPOs indicates that companies may soon get back to the scale of prior years.
Exits - Acquisitions Take Flight
Unicorn IPOs Mixed Out the Gate
This year saw many high-profile unicorns come to the public markets, but it hasn’t been all smooth sailing. Performance has been mixed, with companies like Beyond Meat and Zoom seeing strong returns while others had to navigate through choppier seas amid concerns over unit economics. We also saw another major direct listing with Slack’s IPO—an avenue we expect to become more prevalent in 2020.
Despite the initial mixed performance, a vast majority of companies remain above their LPV2.
Is Decacorn the New Unicorn?
When “unicorn” was originally coined in 2013, it was unique and held more weight. However, as capital has flooded the ecosystem, allowing companies to stay private longer, more companies have enjoyed outsized valuations.
With this phenomenon, focus has shifted to the decacorn tier, which boomed in 2019.
These companies have grown to a size and scale that rivals notable companies within the S&P 500. However, as 2019 proved, bigger isn’t always better when it comes to stock performance.
Decacorn Operating Metrics
This year’s decacorns have been largely in-line with past decacorns in terms of expense spend and capital efficiency. There are a few outliers worth mentioning. Uber’s revenue scale is unlike anything seen before — surely helped by the massive amount raised prior to IPO. Slack’s S&M spend is materially higher than its peers, which is likely tied to its ability to earn more revenue per $1 of S&M spend (also referred to as the “magic number”). Slack’s S&M spend is moderating, down from 63% in 2018 and 99% in 2017.
Decacorn Market Fundamentals
In terms of equity raised and valuation, the current decacorn cohort largely falls in-line with past decacorns. Facebook remains the largest U.S. Tech IPO in terms of valuation — despite Uber raising over 4x more equity than Facebook prior to IPO.
Slack’s IPO revenue multiple is also an outlier, though, Slack’s valuation was determined in a uniquely market-oriented way via direct listing.
Public Tech M&A Heats Up
In 2019, we saw a surge in $1B+ acquisitions from the largest (by market cap) public Tech companies. While the aggregate value is only slightly above 2016, the number of acquisitions is almost 1.5x greater. This is punctuated by the largest deals ever in emerging venture ecosystems, like Seattle (Tableau), Los Angeles (Honey) and Raleigh (Red Hat).
The most active public Tech companies accounted for 84% of the $1B+ acquisitions of the last decade.
Environment Ripe for Further M&A
With record dry powder and healthy corporate balance sheets, ample capital remains available to invest. A sizeable portion of this capital pool could be directed towards M&A. Private Equity continues to explore VC-backed targets, accounting for 30% of all VC-backed Tech exits as of Q3 2019. Big Tech is going bigger in terms of size and number of deals in an effort to grow the top line, acquire new technologies, and stave off competition. We’ve seen this already in the first month of 2020 with Visa’s $5B acquisition of Plaid and the $2.5B PE acquisition of Lytx.
Spotlight - Trends in Europe
Mega Rounds on the Rise in Europe
The volume of European IPOs has been weak, yet the private investment environment continues to be strong — highlighted by a record number of PIPOs in 2019.
Rounds under $10M continue to have a higher concentration of domestic capital. Larger rounds remain reliant on U.S. investor participation, a sign of the nascence of the European venture ecosystem. This also shows the importance of the market to U.S.-based VCs. As valuations rise to record highs in the U.S., European startups are seen as more reasonably priced.
Startups Capitalize on Demand
Capital raises at every stage have more than doubled since the beginning of this decade. In fact, to make the top 10 and 25 deals of 2019, a startup would need to have raised a $100M and $200M round, respectively.
However, the top 10 and 25 deals represent a decreasing portion of total capital invested over the last five years — falling from 26% and 39% to 16% and 27%, respectively.
Europe's Potential for Venture Debt
Over the past several years, the utilization of venture debt in Europe (as a proportion of total venture financing) has continued to climb. Despite the economic similarities between the U.S. and Europe, the difference in venture financing is notable. According to the European Investment Bank, U.S. venture financing stood at ~$100B in 2018, with venture debt representing ~15%. European venture financing in 2018 was ~$23B, with venture debt only accounting for ~5%, highlighting the potential for venture debt to play a greater role as the European venture ecosystem matures.
State of the Markets Team
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