Venture capital update — Back to the future in 2020
VCs banked a record-breaking $250 billion in exits in 2019.
A booming tech IPO and M&A market
Venture-backed companies continue to be the most dominant contributors to the growth of new jobs and wealth globally. Despite the relatively young age of modern venture capital, a fourth of current public US companies received VC financing. Today the top 5 (and 7 out of 10) of the most valuable companies received VC-backing. These public tech companies' total market capitalization now exceeds $7 trillion, and they employ over 3 million people.
Overall the VC market had a banner year of returns in 2019. According to Crunchbase, 1,152 VC-backed companies were sold for $182 billion in 2019. VCs banked an additional $200 billion in IPO exits in 2019. Technology IPOs included big-name brands Lyft, Pinterest, Slack, and Uber, with Airbnb currently teeing-up for an imminent IPO. Unfortunately, the values of all of the aforementioned have fallen significantly since their initial public offerings.
There were just as many IPO winners in 2019 as IPO busts. The top three were Beyond Meat, a Los Angeles-based maker of meat substitutes, video and chat provider Zoom, Medallia that provides customer-feedback management software, cybersecurity company CrowdStrike, and Datadog, a monitoring and data analytics platform for developers.
If the fall of Uber’s Travis Kalanick was the bad boy story of 2018, WeWork co-founder Adam Neumann was passed the torch in 2019. The company’s valuation, once estimated at $47 billion, reportedly has dropped to less than $20 billion, and its initial public offering has been delayed. Ultimately, Neumann was forced to quit as CEO amid problems with the workspace sharing company’s efforts to go public.
CB Insights’ report also says that 2019 saw an interesting trend continue. Of private tech companies that went public, most of them had already reached a $1 billion valuation before the company’s listing. This means 2020 is likely to see additional tech IPOs from companies that have already reached unicorn status via private investment.
The CB Insights report says they’ve identified the top five most-likely prospects using their proprietary company rating algorithm, Mosaic.
- Unity: the company behind the gaming engine platform
- GitLab: the developer operations platform
- Procore: a construction management software company
- Snowflake: a cloud data warehouse provider
- Credit Karma: the personal finance platform
Here come the unicorns
A CBInsights global ‘Unicorn’ tracking report also estimates that right behind these Internet behemoths is 440 private companies currently valued over $1 billion, each with a combined market cap of another $1.4 trillion.
According to NVCA/Pitchbook annual survey, these unicorns have emerged from the current pack of over 50,000 operating venture/angel-backed companies. Angel investing also hit a new record in 2019 with over 4,500 in new startups fundings for an estimated deal value of over $10 billion, which falls short of 2018's record posting but is notably higher than figures of past years. In 2019 US early-stage VCs invested $42 billion across over 3,600 deals, which neared 2018's record highs. Late-stage deal count surpassed 2,500 for the first time in 2019, finishing 2019 at nearly 2,600 deals totaling more than $85 billion invested. Capital raised by US venture funds reached $46.3 billion in 2019, the second-highest annual total in the past decade.
VC powerhouses continue to raise the Big $
Menlo Park-based VC powerhouse Sequoia Capital continues to leverage its operations in China and India and the heart of Silicon Valley as the most dominant VC fund. Sequoia has $3.35 billion in dry powder secured for funds aimed at growth-stage investments in the US as well as venture and growth-stage investments in China, according to Crunchbase News coverage of SEC filings by Sequoia from December 2019.
In 2019 Andreessen Horowitz’s AH LSV Fund I hit its $2 billion fundraising target, alongside the $750 million for AH Fund VI. Interestingly, Andreessen Horowitz restructured itself as a registered investment advisor (or RIA0, providing more options to invest their LPs’ capital in search of outsized returns.
Other marquee funds raised in 2019:
- Accel announced $525 million for Accel XIV, $500 million for Accel Leaders Fund II, $1.5 billion for Accel Growth Fund V, $550 million for Accel India VI, and $575 million Accel London VI, all between May and October.
- Insight Partners, a PE and late-stage venture investment firm, raised $7.3 billion for its 11th flagship fund in November.
- In March, New Enterprise Associates submitted a filing disclosing its intent to raise $3.6 billion for its 17th venture capital fund.
- Qiming Venture Partners filed to raise $250 million for its second U.S.-focused healthcare fund back in February.
- Bessemer Venture Partners filed paperwork indicating raising an undisclosed sum for what it’s calling its “Century Fund” in September.
In May 2017, SoftBank’s first Vision Fund held an initial close of $93.0 billion, nearly hitting its unprecedented $100.0 billion targets. Pitchbook predicts Masayoshi Son‘s SoftBank’s Vision Fund II will not close at its $108.0 billion targets.
Driven by low-interest rates and the passage of the JOBS Act in 2012, a flood of committed capital, and increased participation from nontraditional investors, the Silicon Valley Mega Deal was born. Mega-rounds ($100 million+) and mega-funds ($500 million+) have emerged as a lasting industry component. Mega-rounds hit another record in 2019 with 237 mega-deals representing an 11.8 percent gain over 2018. In 2019, mega-deals accounted for almost 25 percent of private company fundings.
Pitchbook projects that 2020 will mark yet another new annual record for US mega-deals. 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.
Over 40 percent of domestic venture capital is still invested in the San Francisco Bay Area, yet international venture capital investment has risen to equal footing with the United States. There is no question that the emergence and dominance of companies born out of the global Silicon Valley will continue to represent a greater percentage of total world economic power and output over time.
Outlook 2020
Pitchbook’s predictions for 2020 are summarized below and point to a generally bullish view as billions in new capital continues to flow into VC funds, profits are up, and the public markets continue to soar.
2020 will mark a new annual record for US mega-deals.
VC remains an alternative investment strategy wherein investors have successfully sought high growth on both an absolute and relative basis, which has led to rising allocations. Additionally, the positive momentum of returns over the past few years has led to strong distributions from VC funds back to LPs.
Corporate VC activity will reach a new record in 2020.
Deal activity with Corporate VC participation has increased sharply in recent years, with many large incumbents utilizing the strategy to identify emerging trends and access innovative technologies. Corporate VC arms are becoming more entrenched within the VC industry, having raised more funds dedicated to venture pursuits in 2019 than in any previous year, which underpins activity in the years ahead.
The median US VC fund size will top $110 million, reaching a decade high.
Although the median US VC fund size in 2019 has leveled off, we expect to see a significant increase in 2020 for a variety of reasons, including rising allocations to the strategy and decade-high VC fund distributions back to
LPs. This has enabled GPs to raise ever-larger funds as they fuel blitzscaling strategies and strive to keep pace with rising deal sizes.
SoftBank’s second Vision Fund will not close at its target of $108.0 billion.
Rationale: The failure of the WeWork IPO — and the subsequent handling of its fallout — has called into question SoftBank’s Vision Fund strategy, with skepticism, coming both from LPs and the firm’s public shareholders. Besides WeWork, several other mega-investments in the Vision Fund’s portfolio have suffered significant write-downs recently.
At least three direct listings of companies valued over $1 billion will close in 2020.
The momentum behind direct listings has continued to accumulate following Slack’s public debut in April 2019. In October 2019, investment bankers, VC investors, and entrepreneurs held an invitation-only meeting to discuss alternatives to the traditional IPO process, which reportedly featured extensive discussion on direct listings. With its seeming emergence as the preferred alternative IPO for technology startups, and with Airbnb announcing that it might opt for this route in its reported 2020 offering, we see direct listings becoming a standard consideration for companies pursuing a transition the public markets.
The tech boom continues.
The pace of initial public offerings is expected to get off to a strong start in 2020 as debuting companies try to avoid the 2019 belly flop of IPOs or the crash of workspace provider WeWork. There currently are 61 IPOs on file with the Securities and Exchange Commission. They look to raise a combined $10 billion, according to Renaissance Capital, a research firm and manager of the IPO (IPO) exchange-traded fund. Besides, Renaissance estimates another 60 or more companies are preparing for an IPO but have yet to make their plans public.
