Jul 10, 2018 | Techcelerate Ventures |
1Q 2018 An enormous $28.2B invested in 1Q, besting the previous decade high by more than $4B Page 4 The definitive review of the US venture capital ecosystem covering 1Q and beyond Though 1Q exits were slow, the pace is expected to increase as IPOs heat up and corporations use tax breaks for acquisitions Page 26 SoftBank’s Vision Fund has made a splash. Now VCs are gearing up for a battle with mega-funds of their own Page 29 In partnership with Credits & Contact PitchBook Data, Inc. JOHN GABBERT Founder, CEO ADLEY BOWDEN Vice President, Research & Analysis Content NIZAR TARHUNI Associate Director, Research & Analysis KYLE STANFORD Analyst CAMERON STANFILL Analyst JOELLE SOSTHEIM Analyst MASAUN NELSON Data Analyst JENNIFER SAM Senior Graphic Designer RESEARCH email@example.com National Venture Capital Association (NVCA) BOBBY FRANKLIN President & CEO MARYAM HAQUE Senior Vice President of Industry Advancement BEN VEGHTE Vice President of Communications & Marketing Contact NVCA nvca.org firstname.lastname@example.org Silicon Valley Bank GREG BECKER Chief Executive Officer MICHAEL DESCHENEAUX President TRACY ISACKE Head of Corporate Relationship Management BOB BLEE Head of Corporate Finance MATT TROTTER Managing Director of Hardware and Frontier Tech Contact Silicon Valley Bank svb.com email@example.com Perkins Coie BUDDY ARNHEIM Partner, Emerging Companies & Venture Capital FIONA BROPHY Partner, Emerging Companies & Venture Capital CHARLES E. TORRES Partner, Emerging Companies & Venture Capital 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 JERON PAUL CEO, Capshare Contact Solium solium.com Executive summary 3 Overview 4 Angel/seed 7 First financings 8 Solium: Cap table analytics can provide transparency to an opaque industry 9 Early-stage VC 10 Late-stage VC 11 Perkins Coie: Key points for client capital needs and liquidity in today’s venture landscape 12 Activity by region 14 Activity by sector 16 SVB: Advanced manufacturing: Can a cobot help you with that? 17 Life sciences 18 Corporate VC 19 Q&A: As tech disrupts traditional industries, corporations boost startup investment 21 Growth equity 23 SVB: What public market fluctuations signal for venture dealmaking 25 Exits 26 Fundraising 29 1Q league tables 32 Methodology 35 Contents 2 1Q 2018 PITCHBOOK-NVCA VENTURE MONITOR Executive Summary 3 1Q 2018 PITCHBOOK-NVCA VENTURE MONITOR After an active 2017 for investment in US venture-backed companies, momentum in capital deployed continued in the first quarter of 2018 while the pace of companies receiving capital continued to decelerate. A total of 1,683 venture-backed companies raised $28.2 billion in funding during 1Q 2018, marking the fourth consecutive quarter of more than $20 billion deployed to venture-backed companies and the highest amount of capital deployed in a single quarter since at least 2006. In 1Q, 17 unicorns (i.e., companies valued at $1 billion+) attracted a combined $7.2 billion, over one-quarter of total capital deployed to venture-backed companies, the second-highest quarterly deal value share we have tracked. This new normal of sustained rise in capital deployment and fewer completed deals is a continued trend from 2017. Fewer companies receiving funding and at higher valuations has in turn corresponded with increased median deal sizes across all stages. In 1Q, the median early-stage deal reached $9.2 million and median late-stage deal reached $15 million, increases of 3.1x and 2.1x, respectively, compared to just five years ago. Increasing deal sizes across all stages of the company growth cycle can be partly attributed to the sustained momentum in venture capital fundraising over the last several years, which has resulted in a combined $160 billion raised since 2014, including $7.9 billion raised in 1Q 2018. Norwest Venture Partners’ $1.5 billion fund XIV and General Catalyst’s $1.375 billion fund IX were the largest of the 54 venture funds holding a final close. While the total amount of capital raised and number of funds closing in the first quarter—for both new and established firms—was light compared to recent quarters, several prominent venture firms are currently in the market raising funds with multibillion-dollar targets, suggesting a pickup in pace as 2018 unfolds. When factoring in these efforts to raise larger venture capital funds, as well as the ever- increasing role of the $100 billion SoftBank Vision Fund, some investors expect overall investment into venture-backed companies to reach—and perhaps even surpass—the post-dot-com record from 2017. In addition to rising expectations for another year of historical investment activity, optimism is also high for a strengthening exit environment that will bring long-awaited liquidity to venture investors and LPs alike. In the first quarter, there were 144 disclosed venture-backed M&A transactions, led by Amazon’s $1.2 billion acquisition of smart security device company Ring. While venture- backed M&A activity was flat compared to the end of 2017, many investors expect the repatriation provision and the lower corporate rate included in the recently passed tax reform package to provide corporations with additional capital to make strategic acquisitions of venture-backed companies, which may boost M&A activity in the months ahead. A strong 4Q 2017 for venture-backed IPOs signaled continued optimism for 2018, which for the most part played out in the first quarter. In 1Q 2018, there were 15 venture-backed IPOs, led by storage platform Dropbox’s NASDAQ listing on March 23, which raised $756 million at an $8.2 billion valuation. With a recent string of successful enterprise tech IPOs like Dropbox in 2018 and Okta, MongoDB and Mulesoft in 2017, and a healthy pipeline of venture-backed companies readying for IPOs, some investors believe that 2018 will likely be the strongest year for IPO activity in recent memory. Beyond the exit environment, two other areas the industry will continue to closely monitor in 2018 are: 1) the SEC crackdown on initial coin offerings (ICOs), which surfaced in 2017 as a potential disruptor of the venture investment model; and 2) proposed legislation that would affect foreign investment into venture funds and startups, which could result in a costly and opaque process and a burden on the ecosystem. 4 1Q 2018 PITCHBOOK-NVCA VENTURE MONITOR $37.0$27.0$31.2$44.6$41.6$47.0$71.4$81.8$75.3$82.9$28.24,707 4,465 5,378 6,734 7,865 9,226 10,467 10,558 8,824 8,652 1,693 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Deal Value ($B) # of Deals Closed 0 500 1,000 1,500 2,000 2,500 3,000 $0 $5 $10 $15 $20 $25 $30 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Deal Value ($B) # of Deals Closed Angel/Seed Early VC Later VC Overview With over $28 billion invested into the US venture ecosystem, 2018 is pacing to extend the trends we’ve grown accustomed to over the last few years of total capital invested figures soaring to unprecedented levels. While the top-line count of completed financings declined significantly on a quarterly basis in 1Q, we maintain our conviction around the health of investment activity as evidenced by the stability seen in completed financings at both the early and late stage. The primary driver of the decline in round counts can be attributed to the angel market, which has continued to see the pace of investment decline rapidly since mid-2015. However, we see the proliferation of pre-seed investment activity as a key driver in the market that can be rather elusive from a data perspective as many of these deals happen under the radar. Thus, activity across some of the earliest stages of investment activity may be understated, and we think entrepreneurs are finding novel avenues to finance new ideas and business ventures. Late-stage activity remains poised for another notable company fundraising year. Unicorn activity represented over 21% of all venture capital invested in the US in 2017, with more than $17.5 billion* deployed into companies valued over $1 billion during the period. Through the first quarter of 2018, activity in that subset of the market remains on track to surpass 2017’s record total. Investors have piled roughly $5 billion in net new* capital into such companies, accounting for over 18% of all capital invested in the US last quarter. More invested in 1Q 2018 than in full-year 2009 US VC activity 1Q marks fourth consecutive quarter with more than $20B invested US VC activity PitchBook-NVCA Venture Monitor *As of 3/31/2018 PitchBook-NVCA Venture Monitor *two rounds previously closed in 4Q have been adjusted to a 1Q 2018 close due to more capital being added 5 1Q 2018 PITCHBOOK-NVCA VENTURE MONITOR PE continues to be highly involved US VC activity with PE participation Strong start to year for unicorns US unicorn activity PitchBook-NVCA Venture Monitor *As of 3/31/2018 PitchBook-NVCA Venture Monitor *As of 3/31/2018 **Amount includes $2.5 billion from two rounds originally closed in 4Q 2017 While late-stage investments in unicorn companies have become more prominent given the growing age of privately held businesses, round sizes of $1 billion+ certainly have not. That said, 1Q alone saw three such transactions close, with both Lyft and Faraday Future holding final closes on rounds launched in 4Q at $1.7 billion and $1.5 billion, respectively, and Uber closing a $1.25 billion round. For comparison, 2017 in its entirety saw just three completed financings of $1 billion or more. Moving forward, we think rounds of this magnitude will still remain outliers. Moreover, as behemoths such as Uber tap investors for massive rounds, one item that should be noted is that not all of that money is primary capital being used to fund operations. Rather, an increased proportion of some of these rounds represents secondary capital where certain investors and employees are finding avenues to generate liquidity as hold periods have lengthened and exit processes have been delayed. Last, private equity continues to play an increasing role in the venture market. $8.5 billion worth of transactions last quarter involved PE investors, the highest figure we’ve tracked since mid-2012, despite these firms participating in just 8% of VC financings. On the exit front, the proportion of completed VC-backed sales to PE declined relative to what we saw in 2017, during which the highest percentage of exits were completed to PE firms that we’ve ever tracked. Given we are still early in the year, however, we fully expect to see increased activity by PE groups in the venture markets similar to what we saw in 2017 for the following reasons. Through the first quarter of the year, 15% of all completed PE transactions were done in the software space, which is up relative to the 12% number we’ve seen historically. Further, the PE transaction ecosystem continues to support such deals, particularly as companies have been able to establish recurring revenue, cashflow positive and cash-efficient software businesses that fit nicely with the debt structures PE firms typically utilize to complete leveraged buyouts. As roughly 40% of all venture transactions consistently occur in the software space, the venture markets will continue to provide a fertile sourcing ground for PE firms looking to locate quality software targets. Early-stage rounds grow in size by roughly 50% Median deals size ($M) by stage PitchBook-NVCA Venture Monitor *As of 3/31/2018 $11.0$6.8$6.6$12.2$9.1$9.9$19.3$26.6$25.7$23.1$8.5663 451 424 515 556 619 749 764 652 642 139 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Deal Value ($B) # of Deals Closed $6.6$2.4$2.6$13.6$17.0$18.6$17.5$7.2**7 7 9 28 24 23 71 81 55 75 17 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Deal Value ($B) # of Deals Closed $1.0 $1.4 $6.0 $9.2 $11.1 $15.0 $0 $2 $4 $6 $8 $10 $12 $14 $16 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Angel/Seed Early VC Late VC ©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. 7 1Q 2018 PITCHBOOK-NVCA VENTURE MONITOR $449$407$394$669$675$629$541$750$849$1,115$1,253$871$1,462$1,086$1,344$1,555$1,289$1,416$2,045$1,846$2,061$2,146$2,109$1,936$1,671$1,714$1,719$1,548$1,587$1,690$1,895$1,808$1,6240 200 400 600 800 1,000 1,200 1,400 1,600 $0 $500 $1,000 $1,500 $2,000 $2,500 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2010 2011 2012 2013 2014 2015 2016 2017 2018 Deal Value ($B) # of Deals Closed Angel & seed activity drops US angel & seed activity Angel & seed PitchBook-NVCA Venture Monitor *As of 3/31/2018 PitchBook-NVCA Venture Monitor $0.58 $0.86 $1.69 $2.20 $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Angel Seed Median seed deal surpasses $2M Median US angel & seed deal size ($M) Despite deal count across the angel/ seed market continuing to decline, deal value at the stage has remained relatively heightened. The $1.6 billion raised in 1Q marks the 15th straight quarter that more than $1.5 billion was invested into angel/ seed deals. In fact, no less than $1 billion has been invested in the stage during each quarter since 4Q 2012. Prior to that period, the $1 billion mark had only been reached three times in our datasets. Seed deals have reached a median transaction size of $2.2 million and a median post-money valuation of $10.7 million, far and away the largest we have recorded. Record-sized seed funds continue to underpin capital availability at the stage. For instance, Sequoia Capital closed a $180 million seed fund in January, while Khosla Ventures has announced it is raising a $400 million seed vehicle as well. In addition, we have seen various other firms continue investing in seed deals despite running $1 billion+ vehicles. While writing seed-sized checks could appear as a peculiar strategy for some of the larger funds, the Dropbox IPO serves as a good example of why such transactions can still be a valuable portion of a larger firm’s investment strategy. To illustrate, Sequoia realized around $2 billion from Dropbox’s IPO, a company it has held in its portfolio since participating in its 2007 seed round. The heightened deal sizes and valuations are also being driven up by the continued aging of companies raising early-stage institutional capital. The median age of companies raising angel & seed funding in 1Q came in at three years post founding, older than the median age of a company raising a Series A round in 2014, and nearly double the age of a company raising an angel/seed deal in 2011. This shift in age isn’t so much of a trend as it is a change to the traditional investment timeline. Many startups require less capital for operation than before, specifically many software companies that can run cloud servers and hire freelancers until full-time engineers are necessary. This in turn allows businesses to be more developed when first engaging institutional investors, garnering larger deals and valuations. 8 1Q 2018 PITCHBOOK-NVCA VENTURE MONITOR $1.4$1.0$1.0$1.2$1.9$1.3$1.5$1.5$1.6$2.1$1.9$1.5$2.1$1.6$1.5$2.0$1.8$1.7$2.2$2.0$2.0$2.4$2.1$2.3$1.8$1.7$2.0$1.6$1.8$2.1$1.6$2.0$2.40 200 400 600 800 1,000 1,200 $0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2010 2011 2012 2013 2014 2015 2016 2017 2018 Deal Value ($B) # of Deals Closed First financings 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 Financings Follow-on Financings First financings continue to decline First financing vs. follow-on deal by count The number of startups receiving their first round each year has slowly declined US first-financing activity $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* First Financings Follow-on Financings Angel/seed deals have fallen furthest US first-financing VC rounds (#) by stage PitchBook-NVCA Venture Monitor *As of 3/31/2018 PitchBook-NVCA Venture Monitor *As of 3/31/2018 PitchBook-NVCA Venture Monitor 9 1Q 2018 PITCHBOOK-NVCA VENTURE MONITOR Cap table analytics can provide transparency to an opaque industry Companies like Capshare are releasing large descriptive data sets about startup cap tables for the first time. The data, based on thousands of cap tables, provides an insider view of how equity is actually structured in startups. The data show that cap tables evolve in fairly predictable ways as the company grows. For example, employee ownership decreases from 100% at founding to approximately 70% in the seed round and starts to level off around 38% by Series C financings. Employee ownership (and by extension, investor ownership) is so predictable that it almost perfectly fits a log trend line. This math can help both VCs and founders understand typical dilution, as well as calm jittery founders by helping them to understand that although they will likely experience significant dilution, they can also still expect very high personal returns in the end. Other predictable aspects of cap tables include option pools. Option pools are typically set up before seed rounds are completed. Once they are established, they typically hover around 15% of the total capitalization of the company (including issued and unissued options) throughout the startup’s lifecycle. Unissued options decrease slightly as a proportion of total options as the company grows—but only just slightly. Capshare data shows that Series A companies have on average 6% of the total capitalization of the company available for new hires, while Series C companies have only 3%. But cap table data also revealed a few surprises, especially around waterfall analysis. Waterfall analysis takes an assumed value of the company as an input and then shows you exactly what amount of that value each shareholder would be entitled to receive. For example, you could assume a company is worth whatever its last post-money valuation was and then run a waterfall analysis. When we did this we found a tale of two kinds of startups. Generally, startup averages are often skewed upward by the highest performing startups, and that is true in waterfall values as well. Th graph on the right shows aggregate waterfall value to founders based on the stage of company. When looking at both the mean value and the median value, the mean value will be much more affected by the higher performing startups, while median is probably a truer representation of a typical startup. As the graph points out, the median founder waterfall value plateau around Series B and doesn’t really increase much after. However, for those founders in highly successful startups, the value of their shares continues to grow rapidly as the company moves further along the venture lifecycle. Since 1999, Solium has been simplifying the complexities of equity plans through smarter software, remarkable service and trusting relationships. Our Shareworks platform is loved by emerging private companies as well as public enterprises. And more than 10,000 early-stage companies rely on our products and valuation services. Why Solium? Trust a company that manages the equity plans and cap tables of companies that are launching rockets into space, building self-driving cars, disrupting the food delivery business and changing the way we get around. Solium has offices in North America, UK & EMEA and Asia Pacific. Visit us at solium.com. 100% 73% 60% 43% 37% 36% 0% 20% 40% 60% 80% 100% 120% Common Seed Series A Series B Series C Series D+ Median Log. (Median) Employees dilute quickly Employee ownership by stage 1% 7% 7% 8% 11% 11% 9% 7% 6% 8% 6% 4% 3% 5% 0% 2% 4% 6% 8% 10% 12% 14% 16% Common Common + Convertibles Seed Series A Series B Series C Series D+ Unissued Issued 15% option pool typical Issued & unissued options by stage Founder median peaks early Aggregate founder waterfall values ($M) by stage $2.8 $2.0 $5.0 $16.8 $19.5 $24.7 $42.0 $0 $5 $10 $15 $20 $25 $30 $35 $40 $45 Common Common + Convertibles Seed Series A Series B Series C Series D+ Average Median Jeron Paul, Founder and CEO, Capshare Source: Capshare Source: Capshare Source: Capshare 10 1Q 2018 PITCHBOOK-NVCA VENTURE MONITOR Early-stage VC $2.9$2.5$2.6$2.5$3.3$2.9$3.5$3.8$3.0$3.6$3.1$3.1$3.5$3.7$3.4$4.4$4.6$5.1$5.0$5.5$4.9$7.3$6.3$6.2$6.2$6.5$6.1$5.0$5.7$6.7$7.8$9.5$9.90 100 200 300 400 500 600 700 800 900 $0 $2 $4 $6 $8 $10 $12 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2010 2011 2012 2013 2014 2015 2016 2017 2018 Deal Value ($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 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 20082009201020112012201320142015201620172018*$25M+ $10M- $25M $5M- $10M $1M- $5M $500K- $1M Under $500K 81 deals of at least $25M in 1Q US early-stage activity (#) by size Deals
After an active 2017 for investment in US venture-backed companies, momentum in capital deployed continued in the first quarter of 2018 while the pace of companies receiving capital continued to decelerate. A total of 1,683 venture-backed companies raised $28.2 billion in funding during 1Q 2018, marking the fourth consecutive quarter of more than $20 billion deployed to venture-backed companies and the highest amount of capital deployed in a single quarter since at least 2006.
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