Pitchbook Venture Monitor Report 2018 Q3

Oct 16, 2018 | Publisher: Techcelerate Ventures | Category: Finance |  | Collection: Investments | Views: 4 | Likes: 1

3 Q 2018 2018 VC invested primed to top $100 billion Page 4 The definitive review of the US venture capital ecosystem 2018 has discredited rumors of the death of technology IPOs Page 25 Fundraising activity continues hot streak, topping $30 billion for fifth straight year Page 28 In partnership with Credits & Contact PitchBook Data, Inc. JOHN GABBERT Founder, CEO ADLEY BOWDEN Vice President, Research & Analysis Content NIZAR TARHUNI Associate Director, Research CAMERON STANFILL Analyst, VC JOELLE SOSTHEIM Analyst, VC ALEX FREDERICK Analyst, VC BRYAN HANSON Senior Data Analyst JORDAN BECK Data Analyst CAROLINE SUTTIE Production Assistant JENNIFER SAM Senior Graphic Designer RESEARCH reports@pitchbook.com National Venture Capital Association (NVCA) BOBBY FRANKLIN President & CEO MARYAM HAQUE Senior Vice President of Industry Advancement DEVIN MILLER Manager of Communications & Digital Strategy Contact NVCA nvca.org nvca@nvca.org Silicon Valley Bank GREG BECKER Chief Executive Officer MICHAEL DESCHENEAUX President JESSE HURLEY Head of Global Fund Banking SHANE ANDERSON Senior Credit Officer ANN KIM Director, Hardware and Frontier Tech Contact Silicon Valley Bank svb.com venturemonitor@svb.com Perkins Coie FIONA BROPHY Partner, Emerging Companies & Venture Capital RAFEEDAH KEYS Senior Marketing Manager Contact Perkins Coie perkinscoie.com startuppercolator.com Solium KEVIN SWAN VP Corporate Development JEREMY WRIGHT Head of Private Markets STEVE LIU Head of Solium Analytics RYAN LOGUE Head of Business Development Contact Solium solium.com Executive summary 3 Overview 4-6 Angel & seed 8 First financings 9 Early-stage VC 10 Late-stage VC 11 SVB: SVB’s view on the evolving PE market 12 Activity by region 13 Activity by sector 15 Life sciences 16 SVB: Venture debt in a booming tech market 17 Corporate VC 19-20 Perkins Coie: How PE plays into VC-backed exits 21-22 Growth equity 23 Solium: Liquid gold 24 Exits 25-26 SVB: How to spot Space 2.0 opportunities 27 Fundraising 28-29 League tables 30 Methodology 31 Contents 2 3Q 2018 PITCHBOOK-NVC A VENTURE MONITOR Executive summary 3 3Q 2018 PITCHBOOK-NVC A VENTURE MONITOR The trend of high concentration of capital into fewer, larger investments has solidified into the status quo for the US VC ecosystem. Perhaps nothing represents this new normal better than the number of $50 million+ deals closed in 2018 through 3Q, reaching 378 rounds and already surpassing the 292 closed in full-year 2017. Non-traditional VC investors and tech investors are primarily driving this increase. At the same time, several traditional VCs have raised larger funds to compete in the mega-rounds with the SoftBanks of the world, seeing larger amounts of capital as a competitive advantage and opportunity to invest in the best companies. A healthy fundraising environment is also playing a part, as 2018 is on track for a fifth consecutive year of $30 billion+ closed by VC funds. To round out the venture cycle, a healthier IPO market is providing much-needed returns to LPs and capital for reinvestment in VC. This phenomenon hasn’t been limited to just the large late- and growth-stage deals—it’s been at every investment stage and across most sectors. The result has been rising pre-money valuations, most notably for Series A financings, which have typically been less affected by frothy funding markets, but are now experiencing an unusually dramatic increase in valuations. With the recent metamorphosis of the industry, seed-stage financings are also witnessing a transformation since peaking in 2015. The number of seed-stage investments has moderated, as the wave of new angel & seed investors that emerged earlier in the decade and drove up activity for several years has reduced. A cohort of those seed firms has raised larger follow-on funds and more institutional capital, while several firms died off or were not able to raise later funds. This shift has led to many seed deals being completed today at levels that would have amounted to a Series A round just a few years ago. Another ongoing shift in the venture industry is the attention to startups in non-coastal regions of the country. This trend hasn’t quite surfaced in the data yet, but positive sentiment and interest are emerging. Part of the interest stems from the lower cost of startup operations, the demand for follow-on investments in a strong cohort of startups looking for larger pools of capital, and a strong talent pool. How quickly and pronounced this interest will translate in the investment data over the coming months remains to be seen, but coastal and non-coastal investors are showing signs of optimism. A closely watched trend that has unfolded, perhaps more slowly than some anticipated a year ago, has been the opening of the IPO market for tech companies. Through three quarters in 2018, the number of venture-backed IPOs has already surpassed 2016 and 2017. Some investors have described the tech IPO market as in a Goldilocks stage—not too hot and not too cold—making it a prime time for companies to go public, especially as the public markets remain near all-time highs. Another positive signal for a healthy tech IPO window has been the strength and quality of companies once they float. Meanwhile, the life sciences sector, where IPOs have been strong for a number of years, continues its momentum. Despite the welcome re-opening of the venture-backed IPO market, it is fair to say that it should in fact be much more robust. With the public and private markets at or near all-time highs, the number of venture-backed IPOs hasn’t kept pace. The availability of late- stage capital is certainly part of the reason, but there are also a number of policies and economic conditions that are restraining the IPO market for VC-backed companies. NVCA and other organizations have continued to push for policy solutions to address the many issues startups face when going public. These efforts led to the passage of the JOBS and Investor Confidence Act of 2018 in the US House of Representatives in July by an overwhelming bipartisan vote of 406-4. The law, often dubbed “JOBS 3.0,” includes several provisions that would encourage capital formation for US startups and seek to find solutions to some of the issues small capitalization companies face on the public markets. Another notable policy area from 3Q included the August passage of the Foreign Investment Risk Review Modernization Act (FIRRMA), which will have significant effects on VCs with foreign LPs and startups with foreign co-investors. So far, the impact of the law has been limited, with some sectors that were seeing high Chinese investment—such as autonomous vehicles—experiencing a slowdown from foreign investors. There haven’t been large-scale changes yet, but once the new law begins to be implemented in the coming months, expect a more significant impact on the US venture industry. 4 3Q 2018 PITCHBOOK-NVC A VENTURE MONITOR $37.1$27.1$31.3$44.7$41.5$47.6$71.3$81.7$76.4$82.0$84.34,720 4,474 5,399 6,752 7,871 9,272 10,544 10,661 9,087 9,259 6,583 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Deal value ($B) # of deals closed 0 500 1,000 1,500 2,000 2,500 3,000 $0 $5 $10 $15 $20 $25 $30 $35 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 2011 2012 2013 2014 2015 2016 2017 2018 Deal value ($B) # of deals closed Angel & seed Early VC Late VC Overview PitchBook-NVCA Venture Monitor *As of September 30, 2018 PitchBook-NVCA Venture Monitor The US VC asset class saw another quarter of strong activity as capital invested trended toward a new high. 3Q capital investment topped $27.9 billion, pushing YTD 2018 deal value to $84.3 billion—a record amount of capital raised with a quarter remaining. Regarding deal count, the early stage saw a double-digit percentage decline this quarter, but the slowdown was even more pronounced for angel & seed deals, where activity fell 26.5% from 2Q. Annually, deal count currently stands 28.9% shy of the 2017 EOY total, putting 2018 on pace to be about equal with last year. As of 3Q, median VC deal sizes have experienced double-digit percentage growth over 2017. Early-stage deals have seen the greatest increase, rising 25.0% to a median deal size of $7 million. Median pre- money valuations are also climbing across stages. Series B deals saw the greatest growth compared to 2017 at 37.5%. The inflation of valuation figures can be attributed in part to the trend of increasing fund sizes, with investors now viewing large capital reserves as a competitive advantage. In some instances, investors have reportedly pressured firms to accept an investment by threatening to invest in rivals instead. Seeking to compete with large VCs and nontraditional investors, smaller VCs may see capital efficiency put under pressure with more expensive investments and larger absolute returns necessary to satisfy LPs. 2018 deal value has already reached a decade high US VC deal activity Deal value remains elevated US VC deal activity by stage 5 3Q 2018 PITCHBOOK-NVC A VENTURE MONITOR 2.5 3.0 3.6 3.7 5.0 5.3 6.6 7.0 8.8 8.4 0 1 2 3 4 5 6 7 8 9 10 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Angel & seed Series A Series B Series C Series D+ $6.3$2.4$2.6$13.6$16.9$18.5$17.4$19.26 7 9 27 24 23 71 79 55 73 80 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Deal value ($B) # of deals closed PitchBook-NVCA Venture Monitor *As of September 30, 2018 PitchBook-NVCA Venture Monitor *As of September 30, 2018 PitchBook-NVCA Venture Monitor *As of September 30, 2018 Nontraditional investors, such as hedge funds, mutual funds and sovereign wealth funds, made big moves in the first three quarters of 2018, investing in a total of 1,347 deals, on pace to match 2017. Although it’s difficult to ascertain capital invested by a specific group, nontraditional investors participated in deals totaling $50.3 billion over the first three quarters of 2018, reaching a new annual high. Tourist investor participation in deals $50 million or greater increased 43.8% YTD compared to 2017, as these investors tend to back larger, more mature businesses. These deep-pocketed investors are helping to fuel the capital availability that is allowing firms to stay private longer. We expect these firms to continue playing an increasingly active role within VC as companies continue to delay exits and seek capital for further growth. Average time to exit has climbed steadily over the past decade, settling at 6.4 years in 2018. This is due in part to the aforementioned rise in capital availability, especially at the late stage. Median company age has also risen in 2018 for companies raising angel through Series C rounds. Median age rose the most at the angel & seed stage (up 22.8% in 2018 versus last year) in part because investor composition is changing, and firms are investing in more mature companies with lower-risk profiles. Another contributing factor is the rise of unicorns and the increased frequency with which those $1 billion+ valuation firms raise additional capital. At 39 deals and $7.96 billion raised by unicorn firms in 3Q, 2018 is pacing for a new high on both fronts. As the number of unicorns grows, so do the growth of paper gains and unrealized value held illiquid by investors. The unicorn phenomenon has been fueled by the upsurge in mega-rounds. These rounds of at least $100 million are becoming increasingly prevalent in venture deals. 2018 has already reached new records in terms of mega-fund deal count, a 38.8% increase over 2017 with 143 deals closed. Peloton, an at-home fitness equipment manufacturer, raised the largest deal in 3Q: $550.0 million at a $3.6 billion Companies continue to delay raising capital Median age (years) of companies by stage Majority of capital flowing into $50M+ deals US VC deals ($B) by size Unicorns raise record capital in 2018 US unicorn deal activity 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 20082009201020112012201320142015201620172018*$50M+ $25M- $50M $10M- $25M $5M- $10M $1M- $5M Under $1M 6 3Q 2018 PITCHBOOK-NVC A VENTURE MONITOR 4.9 5.0 7.1 4.8 7.6 6.8 0 1 2 3 4 5 6 7 8 9 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Acquisition IPO Buyout 0 50 100 150 200 250 300 350 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 2011 2012 2013 2014 2015 2016 2017 2018 Acquisition IPO Buyout PitchBook-NVCA Venture Monitor *As of September 30, 2018 PitchBook-NVCA Venture Monitor pre-money valuation. Investors have not been shy to invest in consumer businesses, as consumer-focused companies captured 21.7% of the mega-deal capital in 3Q. While companies are taking longer to find the exit, the number of exits in 2018 is expected to meet or exceed 2017 totals. Capital exited is 13.0% shy of 2017 full-year activity, with $20.8 billion exited in 3Q. We expect capital exited to easily surpass 2017 by year end. This rise in capital exited is due, in part, to a greater percentage of companies being exited at larger sizes. 20.4% of exits were at least $100 million versus 16.3% of companies for the entirety of 2017. Median exit size sits at $100.0 million, and average exit has climbed to $244.2 million, a 7.9% increase over 2017 entire year activity. Average post-money valuation also continues to rise, currently settling at $474.16 million, a 43.0% increase on the post-money valuation two years prior. Even though the number of exited companies is flat, capital is being returned to investors at compelling levels. Fundraising, which has been operating at elevated levels since 2014, has already exceeded $30 billion in commitments for the fifth consecutive year. 15 funds have closed on at least $500 million, five of which were over $1 billion. These larger fundraises provide a level of flexibility that allows for a longer fund lifecycle if necessary. This enables investors to commit to companies that may require more patient capital to achieve optimal financial outcomes. Investors are also increasingly raising larger funds to support existing portfolio companies. Lightspeed Venture Partners raised the second largest fund in 3Q, closing on $1.05 billion in commitments with a focus on late-stage VC follow-on rounds in existing Lightspeed portfolio firms. Overall fund count has been remarkably low, with only 57 US VC funds closed in the third quarter. 2018 is pacing to see the lowest fund count since 2014. The trend playing out in fundraising mirrors the overall asset class: Larger sums are being raised across fewer vehicles, and elevated levels of capital are available to startups. Median time to exit slips across IPOs and buyouts Median time to exit (years) by type Buyouts are becoming an increasingly popular exit route US VC exits (#) by type 7 3Q 2018 PITCHBOOK-NVC A VENTURE MONITOR Shareworks enables private companies to offer liquidity to aract and retain employees. Companies can initiate an event, manage it efficiently and finish with certainty. Visit solium.com/liquidity_events Liquidity. Without the IPO. © Solium Capital Inc. 2018. All rights reserved. The Shareworks logo is a trademark of Solium in the U.S, and/or other countries. 8 3Q 2018 PITCHBOOK-NVC A VENTURE MONITOR $0.9$0.6$0.5$0.8$0.9$1.1$1.3$0.9$1.6$1.1$1.4$1.6$1.3$1.4$2.1$1.7$2.1$2.1$2.1$1.9$1.7$1.7$1.7$1.6$1.7$1.8$2.0$1.8$2.0$2.1$1.60 200 400 600 800 1,000 1,200 1,400 1,600 $0 $0.5 $1.0 $1.5 $2.0 $2.5 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 2011 2012 2013 2014 2015 2016 2017 2018 Deal value ($B) # of deals closed Angel & seed PitchBook-NVCA Venture Monitor Angel & seed quarterly deal value slipped slightly in 3Q, ending down from 2Q but within range of a remarkably stable past 16 quarters that have seen US capital investment hover between $1.5 billion and $2.2 billion each quarter. Capital invested slipped from $2.1 billion to $1.6 billion. Deal count, which was already on a slow descent, tumbled from 1,005 to 785 deals closed, a 21.9% decline. The rise in valuations and median deal sizes has been tempered by a downturn in deal count. Despite the dip in capital invested over the past quarter, on an annual basis, 2018 remains on pace to match or exceed activity in 2017. $5.7 billion has been deployed over the first three quarters of 2018, just 21.2% shy of the $7.2 billion allocated last year. Correlated with the phenomenon of dropping deal counts and rising capital investment is the ascent of deal sizes. The proportion of $1 million+ rounds has grown over the past six years and now makes up 56.1% of deals by count. Accordingly, median deal size has continued to climb upward. Median angel & seed deal size has increased 19.4% over the past year. Valuations of angel & seed deals also enlarged 16.7% over 2017, far less than the next biggest valuation increase, which is to say that pre-money valuations are up significantly across all venture stages. Surprisingly, angel valuations have exceeded seed for the first time since 2010. This suggests that angel investors may be joining angel syndicates to increase investment size, therefore taking greater equity stakes. Another option is that angel investors, typically entrepreneurs and high-net-worth individuals, may be artificially inflating pre-money valuation due to a lower level of experience with investment valuation compared to career VCs. The slowdown in the angel & seed fund ecosystem is due primarily to two factors. First, angel & seed funds have institutionalized, attracting larger investors and investments. Second, many high-net-worth angels have formed venture funds to invest in later stage deals or have left angel & seed investing entirely as competition has risen. Falling deal counts notwithstanding, we expect capital invested to grow as median deal sizes continue to climb. Deal sizes continue to grow Median US angel & seed deal size ($M) Angel & seed deal value slips in a trend reversal US angel & seed deal activity $0.5 $0.7 $1.7 $2.0 $0 $0.5 $1.0 $1.5 $2.0 $2.5 2010 2011 2012 2013 2014 2015 2016 2017 2018* Angel Seed PitchBook-NVCA Venture Monitor *As of September 30, 2018 9 3Q 2018 PITCHBOOK-NVC A VENTURE MONITOR First financings $5.8$4.0$4.6$6.1$7.1$7.2$7.6$8.8$7.0$7.4$7.61,624 2,031 2,737 3,205 3,449 3,679 3,440 2,701 2,676 1,594 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Deal value ($B) # of deals closed 1,722 0 2,000 4,000 6,000 8,000 10,000 12,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* First VC Follow-on VC $1.1 $1.4 $3.2 $5.4 $0 $1 $2 $3 $4 $5 $6 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Median Average PitchBook-NVCA Venture Monitor *As of September 30, 2018 PitchBook-NVCA Venture Monitor *As of September 30, 2018 $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* First VC Follow-on VC PitchBook-NVCA Venture Monitor *As of September 30, 2018 PitchBook-NVCA Venture Monitor *As of September 30, 2018 2018 pacing for all-time high in capital raised US first-financing VC deal activity First-time deal count expected to fall in 2018 US first-financing VC rounds versus follow-on VC rounds (#) Median deal size trends upward Median and average US VC first-financing size ($M) Capital raised climbs in proportion to follow-on funding US first-financing VC rounds versus follow-on VC rounds ($B) 10 3Q 2018 PITCHBOOK-NVC A VENTURE MONITOR Early-stage VC $4.7$5.1$4.9$5.6$4.8$7.2$6.3$6.4$5.9$6.3$6.2$5.1$5.7$6.8$7.0$9.5$9.0$9.8$8.90 100 200 300 400 500 600 700 800 900 $0 $2 $4 $6 $8 $10 $12 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 2014 2015 2016 2017 2018 Deal value ($B) # of deals closed 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 20082009201020112012201320142015201620172018*$25M+ $10M- $25M $5M- $10M $1M- $5M $500K- $1M Under $500K $5.6 $7.0 $0 $2 $4 $6 $8 $10 $12 $14 20082009201020112012201320142015201620172018*PitchBook-NVCA Venture Monitor PitchBook-NVCA Venture Monitor *As of September 30, 2018 PitchBook-NVCA Venture Monitor *As of September 30, 2018 After a record-setting previous three quarters, 3Q provided strong yet curtailed deal value. 3Q saw $8.9 billion invested into early-stage firms with median deal size swelling 25.0% to a record $7.0 million. Two of the four largest deals of the quarter were in autonomous vehicle software firms. Zoox raised the most capital in a single early- stage round this quarter by closing on $500 million, and Pony.ai raised $102 million. Biotech firms comprised the other two greatest early- stage deals, with Gossamer Bio and Compass Therapeutics raising a combined $362 million. Massive deal sizes continue to become more prevalent across rounds. In 3Q, 59.0% of early-stage capital flowed into $25 million+ deals, and 94.5% of capital flowed into $10 million+ deals. Median early-stage deal size has increased 100.8% since 2014, compared to a 33.3% increase for late-stage. Unlike the VC industry as a whole, early-stage deal count has been keeping pace with capital invested. 686 deals were closed in 3Q, placing 2018 on pace to exceed 2017. We attribute this strong activity to an increase in non-traditional investors, such as tourist investors and angels. The rise of mega-funds may also be encouraging investors with smaller funds to move earlier in the cycle. Looking closer at VC verticals, emerging tech captured significant capital at the early stages. AI & machine learning companies attracted an impressive 92 early-stage rounds of capital in 3Q. In terms of capital raised, this vertical attracted $1.68 billion, up 42.4% from one quarter alone. One such company, Atrium, raised $64.5 million to utilize machine learning to provide legal services to startups. Life sciences firms drew fewer yet larger early-stage deals than AI, attracting 109 deals and $2.5 billion in aggregate. Despite impressive activity, capital raised in this vertical is down from a peak of $3.4 billion raised in 1Q 2018. Mammoth Biosciences stood out for closing on two investment rounds this quarter (three in 2018 total), raising over $30 million from investors to develop a disease detection platform that uses CRISPR technology. Early-stage investment dips slightly in 3Q US early-stage VC deal activity Companies raising more earlier US early-stage VC deals (#) by size Median early-stage VC deal size continues to rise Median US early-stage deal size ($M) $9.6$6.7$7.2$5.0$5.8$6.5$6.3$5.9$6.2$6.7$7.1$6.8$9.3$13.5$9.2$12.2$13.2$11.3$14.1$10.0$12.1$15.5$10.2$8.3$8.8$12.6$15.2$9.2$17.8$15.7$17.40 100 200 300 400 500 600 700 $0 $2 $4 $6 $8 $10 $12 $14 $16 $18 $20 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 2011 2012 2013 2014 2015 2016 2017 2018 Deal value ($B) # of deals closed 11 3Q 2018 PITCHBOOK-NVC A VENTURE MONITOR Late-stage VC PitchBook-NVCA Venture Monitor *As of September 30, 2018 PitchBook-NVCA Venture Monitor Late-stage venture financings recorded a third consecutive quarter of double-digit, billion-dollar deal value, coming in at $17.4 billion across 466 deals. The late stage has drawn increasing investor interest, as these deals moved to nearly 24% of VC deal count, the highest proportion since 2011. Interestingly, while the pervading trend in the industry since 2015 has been a smaller number of VC deals, 2018 data has shown increasingly robust deal counts in the late stage, with 1,506 deals YTD in 2018, representing 12.0% YoY growth. While it is important to mention that late- stage deals didn’t experience the steeper deal count decrease we saw with angel & seed, the uptick in late-stage volume is another positive signal for the ability of companies to progress through the VC market. Third-quarter data shows sustained activity rather than an extension of this current uptrend in deal counts; however, this count will expand as we continue to collect new deals over time. The overall increase in late-stage activity has been a boon for mega-deals. Startups closed 51 deals larger than $100 million in 3Q 2018, representing $10.96 billion in value and over 63.9% of total late-stage capital invested. To be sure, the disproportionately small number of deals driving this much of total VC deal value at this stage bears consideration. With elevated levels of available capital, companies have more financing choices both inside and outside of traditional VC as they reach scale—a welcome development for growing startups. On the other hand, mega-deals can concentrate risk in fewer companies, and rampant capital availability enables overcapitalization and potentially reckless spending by companies in pursuit of growth. Dealmaking remains elevated in 3Q US late-stage VC deal activity Late-stage market increasingly supporting larger companies US late-stage VC deals (#) by size 0% 20% 40% 60% 80% 100% 2012201320142015201620172018*Under $1M $1M-$5M $5M-$10M $10M-$25M $25M-$50M $50M+ 12 3Q 2018 PITCHBOOK-NVC A VENTURE MONITOR Silicon Valley Bank is well-known for its role in the venture ecosystem. Can you describe how SVB also works with PE firms? We are in the business of financing innovation. This approach extends to our investor partners, and 20 years ago we pioneered creative financing solutions for our venture firm clients. Because of this experience, SVB has also developed unparalleled expertise in lending to and banking PE firms. Today, our Global Fund Banking business works with more than 1,900 venture firms and 700 PE firms globally. SVB’s deep industry experience and nimble approach to fund lending help firms address their financing needs. Our tailored liquidity and fund-level debt solutions include subscription/ capital call facilities, fund-guaranteed loans to portfolio companies, and NAV-based facilities. For example, our Fund Banking team may provide financing to a fund’s portfolio company that perhaps a more traditional bank would not be comfortable offering. The unsecured note is often lent to a holding company housing the fund’s investment in the portfolio company, and the note is guaranteed by the fund. This fund guarantee allows SVB more flexibility in underwriting. As the company scales, it could look to refinance the guaranteed debt, removing the guarantee from the fund. We know there is a lot of dry powder with more firms chasing deals. How is this impacting PE? As of December 31, 2017, US PE dry powder was at $493.6 billion—that’s an incredible amount. Globally, firms continue to raise larger funds, enabled by the robust business environment and an unprecedented pace of deployed capital flowing to larger deals. Also, LPs are flush with distributions from older vintages, with 752 PE–backed exits through September 2018. With the bull stock market of the past decade, LPs must increase capital allocated to PE to maintain internal PE target allocations. We’ve also seen strong returns in PE over the past five years, and GPs are not paid to try to time the market; so given the sheer amount of dry powder, there is a need to keep deploying capital, even if some think valuations are frothy. As a result, PE deal multiples are reaching historic highs. We are also seeing PE firms deploy new strategies, including credit options to augment existing growth, buyout and real estate funds. Given these firms’ robust deal-sourcing methods, they often find opportunities that may not fit their equity strategy but would be a good match for a debt investment. In other cases, they may supply credit exclusively to their existing portfolio companies in need. In both scenarios, PE funds are seeking to capture the value internally instead of sending it to a third-party debt fund. Some of the larger PE firms are carving off smaller pieces of their growth funds to focus on seed or Series A deals. This strategy helps deal sourcing and identifies potential investment opportunities. As those younger companies mature, the PE fund may have a good vantage point from which to consider making a later investment from its larger growth fund. With such rich valuations in growth and middle- market companies, funds are chasing better returns and investing in earlier stages. Looking ahead at the next 12-18 months, how do you see PE evolving? Short term, I don’t see the supply/demand equation of capital versus opportunities changing meaningfully anytime soon, so deal multiples will likely remain high. Even if we see an economic downturn or a material ramp in interest rates constraining borrowing capacity, there still will be historic amounts of dry powder (both direct and secondary) to fuel liquidity options. Stating the obvious, it’s definitely time to be harvesting; many firms already have. With fresh allocations from LPs on the horizon, I expect fundraising to continue unabated in 1H 2019. Another trend we are monitoring is what I would call the blending of capital sources in PE and venture investing. PE and hedge funds continue to show more interest in venture and growth- type deals, as their deal flow remains limited and hyper-competitive. I’ve spoken with multiple Series A venture firms that say they now view PE as a top potential liquidity option for their portfolio companies. In general, it is a phenomenal time to be an entrepreneur and a founder. With such fierce competition for deals, what other nontraditional strategies are PE firms considering? We have seen platform models being deployed with more regularity, a strategy in which firms are aiming to buy small companies at low multiples, build in a fragmented market and then sell the larger company at higher multiples. Other interesting trends we’ve seen lately include hardware-as-a-service, alternative-financing/fintech companies and their warehouse needs, and home-as-a-service. We’ve seen PE firms targeting the fragmented home-service market to roll up multiple companies and take on a market. As a dad of two young kids, this market particularly resonates with me: I go home at night and struggle to find time to cook or mow my lawn or clean the house or work on my HVAC system. So consumers may be willing to pay nearly whatever it takes to get these kinds of recurring services, which can carry attractive margins. Q&A: SVB’s view on the evolving PE market By Jesse Hurley, Head of Global Fund Banking, Silicon Valley Bank Smaller markets have been proportionally resilient US VC deals by region (3Q 2018) Traditional hubs still account for preponderance of activity US VC deals by region (3Q 2018) PitchBook-NVCA Venture Monitor VC activity is starting to move away from traditional hubs Select US MSAs as a proportion (#) of total VC West Coast 38.3% of 3Q deals 54.7% of 3Q deal value Mountain 6.8% of 3Q deals 3.2% of 3Q deal value Midwest 1.7% of 3Q deals 0.7% of 3Q deal value South 6.0% of 3Q deals 1.9% of 3Q deal value Great Lakes 9.7% of 3Q deals 4.8% of 3Q deal value Southeast 7.3% of 3Q deals 2.6% of 3Q deal value Mid-Atlantic 20.4% of 3Q deals 20.1% of 3Q deal value New England 10.0% of 3Q deals 11.9% of 3Q deal value 6.5% 6.2% 7.2% 5.2% 12.5% 9.5% 17.5% 14.7% 5.6% 4.1% 0% 5% 10% 15% 20% 25% 2014 2015 2016 2017 2018* Boston Los Angeles New York San Francisco San Jose Region Deal count Deal value ($M) Great Lakes 187 $1,347 Mid-Atlantic 393 $5,606 Midwest 33 $195 Mountain 131 $903 New England 193 $3,322 South 115 $530 Southeast 140 $711 West Coast 739 $15,230 PitchBook-NVCA Venture Monitor PitchBook-NVCA Venture Monitor *As of September 30, 2018 13 3Q 2018 PITCHBOOK-NVC A VENTURE MONITOR Activity by region Shape the future of the venture industry with NVCA ADVOCACY COMMUNITY & EDUCATION RESEARCH JOIN US! Please contact NVCA with your membership inquiries membership@nvca.org 202.864.5918 15 3Q 2018 PITCHBOOK-NVC A VENTURE MONITOR Activity by sector 0 2,000 4,000 6,000 8,000 10,000 12,000 20082009201020112012201320142015201620172018*Commercial services Consumer goods & recreation Energy HC devices & supplies HC services & systems IT hardware Media Other Pharma & biotech Software $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 20082009201020112012201320142015201620172018*Commercial services Consumer goods & recreation Energy HC devices & supplies HC services & systems IT hardware Media Other Pharma & biotech Software 1,670 1,449 1,869 2,625 3,226 3,862 4,504 4,266 3,698 3,668 2,735 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 20082009201020112012201320142015201620172018*# of software deals closed Software as % of total VC $10.0$7.3$8.3$15.3$13.6$16.3$31.3$32.4$37.0$31.0$35.80% 10% 20% 30% 40% 50% 60% $0 $5 $10 $15 $20 $25 $30 $35 $40 20082009201020112012201320142015201620172018*Software deal value Software as % of total VC PitchBook-NVCA Venture Monitor *As of September 30, 2018 PitchBook-NVCA Venture Monitor *As of September 30, 2018 PitchBook-NVCA Venture Monitor *As of September 30, 2018 PitchBook-NVCA Venture Monitor *As of September 30, 2018 Software evens out, as pharma & biotech grows most US VC deals (#) by sector Maturing software companies continue to drive VC deal flow US software deals (#) as proportion of total VC Pharma & biotech sets annual record high of $14B+ US VC deals ($B) by sector Relative activity evens out US software deals ($B) as proportion of total VC 16 3Q 2018 PITCHBOOK-NVC A VENTURE MONITOR Life sciences 13.5% 15.0% 0% 5% 10% 15% 20% 25% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 20082009201020112012201320142015201620172018*$50M+ $25M-$50M $10M- $25M $5M- $10M $1M-$5M Under $1M 0 200 400 600 800 1,000 1,200 1,400 20082009201020112012201320142015201620172018*Pharma & biotech HC devices & supplies $9.3$7.9$7.8$8.7$8.6$9.9$12.3$14.9$12.5$16.7$19.10 200 400 600 800 1,000 1,200 1,400 $0 $5 $10 $15 $20 $25 20082009201020112012201320142015201620172018*Deal value ($B) # of deals closed PitchBook-NVCA Venture Monitor *As of September 30, 2018 PitchBook-NVCA Venture Monitor *As of September 30, 2018 PitchBook-NVCA Venture Monitor *As of September 30, 2018 PitchBook-NVCA Venture Monitor *As of September 30, 2018 Venture inflation underpins life sciences’ surge US VC life sciences deal activity Proportionate activity continues to climb US life sciences deals (#) as proportion of total VC Life sciences pacing for another strong year US VC life sciences deals (#) by sector VCs gravitate toward larger deals US VC life sciences deals (#) by size 17 3Q 2018 PITCHBOOK-NVC A VENTURE MONITOR Venture debt in a booming tech market By Shane Anderson, Senior Credit Officer, Silicon Valley Bank Driven by increasingly larger deals, VC investment in 2018 is on pace to hit a decade- high level. In the first nine months of the year, the median size of US deals grew an impressive 23.8% over 2017. In the first three quarters of 2018, the number of $100 million+ financings increased 90.7% over the same period in 2017. But the total number of deals has declined, continuing the trend of more money chasing bigger transactions. What role does venture debt play in this capital-rich environment? Consider that as round sizes drive up corresponding valuations, the pace of innovation and potential for global impact require even greater investment. For example, frontier tech—including robotics, autonomous vehicles, space and artificial intelligence—agtech and fintech are at a key inflection point, addressing monumental challenges and seeking global audiences. The cost of deploying these innovations in quickly evolving and massive marketplaces, with increased competition and growing regulations, drives companies to seek additional capital at pivotal times in their growth cycle. Innovation requires immense capital Over the years, Silicon Valley Bank has observed how scaling venture-backed companies use venture debt in boom times and downturns. Today, venture debt remains an important part of the fundraising cycle. A quick primer: Venture debt works best in tandem with a complementary equity capital raise. A significant benefit of venture debt is that it can provide an extension of runway, allowing companies to demonstrate to investors that they are making additional progress toward critical milestones ahead of the next round. Sometimes, if that runway gets a company to cash flow-positive operations, an additional round becomes unnecessary. We find that emerging growth companies are attracted to venture debt as a means of lowering the total cost of capital in an attempt to avoid the dilution that comes with an equity raise. Most venture debt structures include only a fraction of dilution compared with an equity event—a plus for management and employees. The basic points of venture debt Venture debt is intended to provide three to nine months of additional capital to support investing activities for whatever pivotal functions are needed to achieve milestones. It could be used to hire or bolster a sales team, improve marketing, invest in research and development or buy capital equipment to get to commercialization and begin scaling. Typically, the amount of venture debt is set to 20% to 35% of the most recent equity round. The amount of the debt is based on multiple factors, including company growth rates, the investor syndicate, sector, customer niche and other potential capitalization risks. SVB has observed that venture debt–to–valuation ratio, a common metric for evaluating debt worthiness, hovers consistently between 6% and 8% of the company’s last post-money valuation. This ratio is not set in stone but is the average level that we are seeing across various company stages, business models and sectors. Often, the cost of venture debt is small relative to additional runway acquired. There will typically be a draw period, which provides a window during which the company doesn’t need to take the debt down immediately. The current cost of debt is typically around a 6% IRR (and may include an option to defer interest to the loan’s maturity, thus preserving more cash). Warrants—typically expressed as warrant coverage or fully diluted ownership—also must be factored into the cost. It isn’t uncommon to see draw availability or the interest-only period tied to milestones that align with investor expectations of when the next equity round may be raised. Sometimes, venture debt is not drawn at all, serving more as insurance for a rainy day, and it is commonly repaid with the next fundraising event—having done its intended job of extending runway to the next round. Debt versus equity example Say a company raises $10 million at a $50 million valuation, the equivalent of 20% of the company. The company still needs an additional $2 million to achieve key milestones and increase its prospective valuation ahead of raising the next round of capital. Comparing venture debt versus equity, the company can either take an additional $2 million from investors at the same valuation, giving up an additional 4% of ownership, or get $2 million in venture debt at 25 basis points, or one-quarter of 1% of ownership. Timing venture debt Raising debt when a company is flush with cash may seem counterintuitive, but in many cases, the debt can be structured with an extended draw period so that the loan need not be funded right away. Regardless of when a company may want to fund the loan, typically creditworthiness and bargaining leverage are highest immediately after closing on new equity. Innovation takes ingenuity and sizable capital. Even in a time of abundant cash, venture debt is an attractive financing option for growing venture-backed companies seeking to extend runway, lower their cost of capital and keep innovation thriving. ©2018 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of the FDIC and the Federal Reserve System. SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license. For 35 years, Silicon Valley Bank has been at the intersection of innovation and capital. We provide unique access to insights and strategies for companies of all sizes, in innovation centers around the world. All designed to help you find what’s next. svb.com The insights you need to discover what’s next. 19 3Q 2018 PITCHBOOK-NVC A VENTURE MONITOR Corporate VC 44.2% 46.7% 15.2% 16.6% 0% 10% 20% 30% 40% 50% 60% 20082009201020112012201320142015201620172018*% of VC deal value % of VC deal count 224 162 682 514 497 420 0 100 200 300 400 500 600 700 800 20082009201020112012201320142015201620172018*Angel & seed Early VC Late VC $9.9$6.4$8.0$13.1$12.0$15.2$26.9$36.8$36.7$36.3$39.3686 484 573 727 850 1,089 1,351 1,481 1,416 1,403 1,096 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Deal value ($B) # of deals closed PitchBook-NVCA Venture Monitor *As of September 30, 2018 PitchBook-NVCA Venture Monitor *As of September 30, 2018 PitchBook-NVCA Venture Monitor *As of September 30, 2018 CVC continues to make up a larger share of overall investment US deals with CVC participation as a proportion of total VC CVC deal count pacing to match 2017 US VC deals (#) with CVC participation by stage Corporate investment has continued to skyrocket in the third quarter of 2018. CVC participation in venture deals has already surpassed 2017’s annual totals, with corporates participating in $39.3 billion worth of venture financings. Over the last five years, corporate investment has more than doubled from the $15.2 billion invested in 2013. While deal count in the third quarter trended downward year over year, the number of deals closed with CVC participation is still on pace to surpass 1,400 in 2018 for the fourth year in a row. Notably, deals with participation from corporate investors make up 46.7% of overall VC, a high point compared to just 32.0% five years ago. This historically high investment activity and these larger deal sizes may relate to the greater capital availability from corporate tax cuts and capital repatriation, as well as strategic initiatives to fund innovative technologies. Corporate investment has become increasingly concentrated in larger late-stage rounds. Where deals $25 million or larger accounted for 22.4% and 24.8% of activity in 2016 and 2017, respectively, that proportion has risen to 34.5% this year. Strategic investments and partnerships continue to be a ripe avenue for corporate growth, potential new business lines and technological improvements. While CVC investments provide insight into potential acquisition targets, they also illustrate larger industry movements toward tech-based products and services. Software and biotech continue to dominate CVC activity, especially among the quarter’s largest deals. Late-stage companies integrating emerging technologies such as artificial intelligence into existing industries, particularly 2018 CVC participation surpasses last year’s total US deal activity with CVC participation 20 3Q 2018 PITCHBOOK-NVC A VENTURE MONITOR 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 20082009201020112012201320142015201620172018*$50M+ $25M- $50M $10M- $25M $5M- $10M $1M- $5M Under $1M 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 20082009201020112012201320142015201620172018*$50M+ $25M- $50M $10M- $25M $5M- $10M $1M- $5M Under $1M 0 200 400 600 800 1,000 1,200 1,400 1,600 20082009201020112012201320142015201620172018*Commercial services Consumer foods & recreation Energy HC devices & supplies HC services & systems IT hardware Media Other Pharma & biotech Software $0 $5 $10 $15 $20 $25 $30 $35 $40 $45 20082009201020112012201320142015201620172018*Commercial services Consumer goods & recreation Energy HC devices & supplies HC services & systems IT hardware Media Other Pharma & biotech Software PitchBook-NVCA Venture Monitor *As of September 30, 2018 PitchBook-NVCA Venture Monitor *As of September 30, 2018 PitchBook-NVCA Venture Monitor *As of September 30, 2018 PitchBook-NVCA Venture Monitor *As of September 30, 2018 CVC participating in more $25M+ deals US VC deals (#) with CVC participation by size automobiles, continue to be popular with strategic investors. Toyota Motors led two of the quarter’s largest deals, making a $500.0 million investment and strategic partnership with Uber, as well as co-investing with SoftBank in Getaround’s $300.0 million Series D. Toyota’s partnership with Uber made public its intent to deploy a fleet of mass-produced, self-driving cars on Uber’s network. We’ve asserted previously that Uber would be wise to divest its autonomous vehicle unit due to its slow technological progress in comparison to competitors and the considerable costs of adding and maintaining physical assets in mass. With Toyota’s responsibility for the fleet, however, Uber may overcome the latter issue of fleet maintenance. The partnership also marks Toyota’s notable advances into autonomous vehicles, ridesharing and larger market growth. Incumbents in the financial services sector are also tapping startups to update legacy technical infrastructure and consolidate operating processes via blockchain technology. The third quarter saw a $32.0 million investment by JP Morgan, Citigroup, Wells Fargo, Fintech Collective and other notable VCs into Axoni, an enterprise blockchain solution provider for capital market operations. Axoni focuses its services on enterprise software for post-trade processing (clearing & settlement), as well as workflow automation of back-office operations. With many banks well-aware of the technical debt they incur by failing to update and innovate their internal technology, this investment signals exploration and perhaps willingness by industry leaders to migrate to blockchain infrastructure. Largest financings dominate capital invested US VC deals ($) with CVC participation by size Software a popular avenue for innovation US VC deals (#) with CVC participation by sector Biotechs secure outsized rounds US VC deals ($B) with CVC participation by sector 21 3Q 2018 PITCHBOOK-NVC A VENTURE MONITOR Fiona Brophy serves as the co-chair of Perkins Coie’s Emerging Companies and Venture Capital practice and is based in San Francisco. Fiona works with technology startups, and has a robust M&A practice, primarily representing VC-backed sellers and strategic buyers. With more than 1,000 lawyers in 19 offices across the United States and Asia, Perkins Coie represents great companies across a wide range of industries and stages of growth—from startups to FORTUNE 50 corporations. Attorneys in our Emerging Companies and Venture Capital practice offer one of the premier legal resources in the nation for venture-backed companies that have IP as a key value driver. Our clients turn to us for guidance on company formation, IP protection and enforcement, financings, corporate governance, technology transactions, product counsel, and mergers and acquisitions, to name a few of the legal areas on which we focus. We also represent investors as they make, manage and divest investments in diverse industries. Learn more at perkinscoie.com and startuppercolator.com. Q&A: How PE plays into VC-backed exits By Fiona Brophy, Partner and ECVC Co-Chair, Perkins Coie How has the mix of acquirers changed for VC-backed companies? Specifically, are you seeing more PE firms buying VC- backed companies than before? If so, what do you think is driving that? Over the last several years, we’ve seen PE buyers showing up in more deals involving VC-backed tech companies. Those PE firms that were early in pursuing VC-backed tech firms have been very successful. A good example is Vista Equity Partners, which has seen very strong returns investing in and acquiring enterprise software companies, many of which are VC-backed. PE firms have lots of capital to deploy and are finding good opportunities in more mature VC-backed startups that have solid revenues but still room to create additional value. These targets align well with the PE model. As a result, we are seeing PE buyers in more deals and filling the gap created by the dip in strategic acquisitions over the last several years. While it is not totally clear why strategic acquisitions have been down, some point to weariness of strategic buyers over the high valuations being placed on VC-backed startups in recent years. Many of these late-stage VC-backed companies raised multiple series of venture money at robust valuations—and when it comes time to exit, they are finding that their expectations on valuation don’t align with strategic buyers. In some cases, we are seeing PE firms, that have record amounts of capital to deploy, outbid strategic buyers. This is particularly true in enterprise software where late-stage VC-backed companies have solid recurring revenue. In certain industries where there are multiple VC-backed companies with complementary product offerings, PE firms can roll up several companies, sometimes leveraging an existing portfolio company to serve as the buyer. PE buyers are offering boards of VC-backed companies an additional option to explore when they consider a sale transaction, and many boa

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The trend of high concentration of capital into fewer, larger investments has solidified into the status quo for the US VC ecosystem. Perhaps nothing represents this new normal better than the number of $50 million+ deals closed in 2018 through 3Q, reaching 378 rounds and already surpassing the 292 closed in full-year 2017. Non-traditional VC investors and tech investors are primarily driving this increase. At the same time, several traditional VCs have raised larger funds to compete in the mega-rounds with the SoftBanks of the world, seeing larger amounts of capital as a competitive advantage and opportunity to invest in the best companies. A healthy fundraising environment is also playing a part, as 2018 is on track for a fifth consecutive year of $30 billion+ closed by VC funds. To round out the venture cycle, a healthier IPO market is providing much-needed returns to LPs and capital for reinvestment in VC.

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