PitchBook reports

PAGE 16: FUNDRAISING DROPS PAGE 18: 3Q 2015 LEAGUE TABLES

4Q 2015 SPONSORED BY

3Q records $14.1B invested at the late stage PAG E 8 »

Women-founded cos. raise 14% of VC invested PAG E 9 »

Q&A: Lightspeed partner Will Kohler PAG E 1 1 »

CREDITS & CONTACT

CONTENTS 3 4-5 6 7 8 9 10 11 12 13 14-15 16-17 18

Introduction

PitchBook Data, Inc. JOHN GABBERT Founder, CEO ADLEY BOWDEN Vice President, Market Development & Analysis

Content, Design, Editing & Data GARRET T BL ACK Editor ANDY WHITE Analysis Manager

Overview

DANIEL COOK Senior Data Analyst NIZAR TARH U NI Senior Financial Writer K YLE STANFORD Senior Financial Writer

Angel/Seed

CHEL SE A HARRIS Data Analyst BRIAN LEE Data Analyst J ENNIFER SAM Senior Graphic Designer

Early Stage

J ESS CHAIDEZ Graphic Designer

Contact PitchBook www.pitchbook.com

Late Stage

RESE ARCH [email protected]

Women Founders

EDITORIAL [email protected] SALES

Activity by Sector

[email protected]

Q&A: Lightspeed Venture Partners Exits Overview Exits by Type Exit Trends Fundraising Overview League Tables

COPYRIGHT © 2015 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems—without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment.

2 P I TC H B O O K 4 Q 2015 U. S . V E N T U R E I N D U S T RY R E P O R T

Introduction Many interesting trends have emerged in the U.S. venture industry over the past few years. Analyzed nearly to the point of exhaustion, the “unicorn” phenomenon—the boom in the number of venturebacked companies valued at $1 billion or more, coined by Aileen Lee of Cowboy Ventures—is probably the best known. The unicorn club is merely the sensationalized crest of an immense wave of venture capital that has flooded startups in the late stage of development over the past few years. Drivers of the wave are multiple and interwoven: a sustained bull run in public markets; persistently low interest rates; the JOBS Act; new, nontraditional investors entering venture rounds; rapid advances in key sectors enabling lower launch costs, etc. We’ve covered all of these comprehensively across multiple publications, even dedicating one entire report to VCbacked unicorns exclusively. When numbers for the third quarter of 2015 came rolling in, it became clear that it was time to take a closer look at exit activity. U.S. VC is not exactly undergoing a slump, although the overall number of rounds has plunged over the past few quarters. Capital invested escalated yet again in 3Q 2015 at $21.6 billion, even eclipsing the massive sums seen in 2Q, so a slump doesn’t seem exactly the right term. Rather, it’s an alarming lack in the spread of the flow of

capital, with many late-stage companies attracting a disproportionate share of overall venture funding—a rich-get-richer effect, in some cases, which could signal the approach of a peak in the cycle, especially as early stage numbers are sliding considerably. As these companies tend to be older and at a point where, in the past, investors have begun pressuring for an exit, it seemed timely to look more closely at whether historical exit data suggests liquidity on a sufficient scale is achievable. Consequently we expanded our exits section considerably, analyzing the percentages of companies that go public by amount of capital raised, as well as the acquisitions of the most prolific startup buyers, such as Google and Twitter. We also sat down with Will Kohler, partner at Lightspeed Venture Partners—sponsor of this report— to talk about a variety of topics; we also included a special insert of content we are still developing, covering women in venture capital. For this report, it seemed apt to include a brief sample of broader datasets covering venture funding of women-founded companies, as well as a few other snippets. We hope this report helps inform your decisionmaking process in the quarters ahead. If you have any questions, comments or suggestions, please contact us at [email protected].

Is the peak of the venture cycle approaching?

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Overview U.S. VC ACTIVITY BY QUARTER $25

2,269

1,571

$15 $10

2,050

1,933

$20

1,020

1,008

2,022

2,500 2,201 1,866

2,000

1,759

1,496

1,444

1,186 1,148

1,500 1,000

$5

500

$0

0 1Q

3Q

1Q

3Q

1Q

2009 2010 Capital Invested ($B)

3Q

1Q

3Q

2011 2012 # of Deals Closed

1Q

3Q

1Q

2013 Angel/Seed

3Q 2014 Early VC

1Q

3Q 2015 Late VC Source: PitchBook

Venture activity in the third quarter of 2015 was down 36% from a peak of 2,269 rounds in 1Q 2014. U.S. VC ACTIVITY BY YEAR $70

10,000 Capital Invested ($B)

$60

8,116

# of Deals Closed

8,661

9,000 8,000

7,265

$50

7,000

5,991

$40

4,766 3,988

$30

5,162

4,359

3,066

5,000

3,000 2,000 $60

$66

$43

$39

$41

$29

$26

$36

$34

$10 $0

6,000

4,000

4,017

$20

$28

The gradual diminishing in U.S. venture activity accelerated into a plummet in the third quarter of 2015. At 1,444 completed financings, total round count is down 22% quarter-onquarter (QoQ) and 34% compared to 3Q 2014. In fact, the number of financings hasn’t been this low in a given quarter since 2Q 2011. Yearly numbers look somewhat better, with the number of financings breaking 5,000 for 2015 to date, but compared to 2013 and 2014, the decline is still evident. It’s easy to see the drivers of that decline when looking at the levels of round sizes and valuations, both of which are implied by the totals of capital invested. Our most recent VC Valuations & Trends report saw median valuations hit new records across all stages, with Series D or later achieving a staggering $184 million median pre-money valuation and Series B no less than $41 million.

1,000 0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

Note: In recent months, we have significantly expanded our coverage of early stage activity. In addition, we expanded our coverage of angel/seed activity to include investments in any innovative, early stage companies. We previously capped our methodology at $500,000 per round. We have lifted that cap in order to capture everything that appears to be an early stage investment.

Source: PitchBook *As of 9/30/2015


U.S. VC ACTIVITY (#) BY STAGE AND YEAR 4,000

Angel/Seed

3,500

Early VC

Late VC

3,000 2,500

2,269

2,000

1,768

1,500

1,125

1,000 500 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* Source: PitchBook *As of 9/30/2015

2014

2015

U.S. VC ACTIVITY (#) BY STAGE AND QUARTER

2013

3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 0%

20% 40% 60% 80% 100% Angel/Seed Early VC Late VC Source: PitchBook

FIRST FINANCINGS BY YEAR (U.S.) $8

Capital Invested ($B)

$7

2,461

$6

3,000

2,967

2,500

$5

1,742

$4 $3

3,500

3,107 3,074

# of Deals Closed

2,000

1,539 1,568 973

1,157

1,459 1,409

$5

$7

$6

$7

$6

$4

$4

$6

$6

$0

$5

$1

1,500 1,000

$2 $5

Even if the drop in the overall number of financings is steepening, dollars invested are still flowing so strongly the narrowing of the VC funnel is becoming more apparent. As the breadth of activity compresses to favor the proportion of late-stage rounds, the stream of capital has intensified. The herd of heavily capitalized, mature companies is steadily growing. In addition, a fair amount of late-stage money goes toward re-upping the ante in companies like Domo that raised large amounts just last year. Such follow-on financings imply that many are making a push for maximum growth, attempting to sustain momentum and transform paper gains into real value. Whether it is doable will largely be seen on a case-by-case basis, but we keep hearing of apprehension across the industry that if the tide of capital recedes, many are illequipped to cope. What this sustained push at the late stage signals for the venture industry as a whole is a different matter. The number of first financings is considerably off the tallies of the last three years, even if capital invested is strong. As a thermometer of the VC industry, that drop suggests caution is manifesting more often. All the value creation and massive sums invested have been private, so, unlike the tech bubble, a deflation will mainly hurt the high-flying, least-prepared companies and their investors and employees. VCs know this all too well. Accordingly, they are beginning to pull back in the number of financings, if not just yet closing off the spigot of late-stage capital, although it’s hard to see that continuing to flow so heavily for much longer.

500 0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* Source: PitchBook *As of 9/30/2015. First financing is tracked as the first outside funding a company receives.


Angel/Seed U.S. ANGEL/SEED ACTIVITY BY QUARTER $2,500

1,200 # of Deals Closed

Capital Invested ($M)

929

$2,000 763

$1,500 518

577

600

$1,665

$2,013

$1,757

$1,596

$982

$814

$849

$702

$847

$697

$661

$596

$410

$451

$1,945

400

$474

$501

$256

$297

800

822

422 456

268 $236

$0

1,000

870

672

$1,188

$500

307

863

$1,220

288

301

882

884

$1,381

$1,000

871 834

701 686

503

1,027

1,009

200 0

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 2010

2011

2012

2013

2014

2015 Source: PitchBook

ANGEL/SEED $ INVESTED BY ROUND SIZE 100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

Under $500K

$500K-$1M

$1M-$5M

2015*

2014

2013

2012

2011

2010

2009

2008

2007

0% 2006

As investors grow warier of the rising temperature in the VC ecosystem, the count of angel/seed financings has fallen dramatically. The risks are greatest at this stage, rendering the type of round size inflation evident in the chart to the right less justifiable. In light of that, it is unsurprising that the 577 completed angel/seed financings in 3Q represents a 34% drop from 2Q numbers. What is surprising is that capital invested is still lofty at close to $1.7 billion. Investors are still willing to cut sizable checks, with well over half of all angel/seed capital invested in rounds worth $5 million or more. Part of that is due to the founders that are currently fundraising are adapting to today’s venture climate and asking for enough capital to reach the metrics Series A investors now require. To produce significant growth nowadays takes a lot of cash, given the level of competition, even if other key costs have fallen. Consequently,

$5M+ Source: PitchBook *As of 9/30/2015

angel/seed investors are clearly growing more selective, judging by the sharp decrease in financings, but they are still willing to make hefty bets for now at least. This could bode well for the industry

and innovation in the U.S. in general down the road, as firms are willing to continue funding even with the likelihood of a potential correction downstream and in public markets looming. 6 P I TC H B O O K 4 Q 2015 U. S . V E N T U R E I N D U S T RY R E P O R T

Early Stage U.S. EARLY STAGE ACTIVITY BY QUARTER $7


# of Deals Closed

$6 $5 $4

729 725 659 532 547

621

517 536

738

738

900 754

705

655 656

615

578

673

793 810

800 685

700

632

600

628

500

508

400

$3

300

$2

100

$5.9

$6.7

$5.3

$4.7

$5.2

$5.4

$4.7

$4.5

$3.6

$3.7

$3.3

$3.0

$3.0

$4.0

$3.0

$3.7

$3.5

$2.9

$3.4

$2.5

$2.8

$2.6

$0

200 $3.0

$1

0


2011

2012

2013

2014


EARLY STAGE $ INVESTED BY ROUND SIZE 100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

Under $500K

$500K-$1M

$1M-$5M

$5M-$10M

$10M-$25M

2015*

2014

2013

2012

2011

2010

2009

2008

2007

0% 2006

Early-stage investments in 3Q fell by almost 20% QoQ, hitting the lowest quarterly total in more than five years. Capital invested remained very high, however, with the $5.9 billion invested trailing only the $6.7 billion in 2Q, highlighting the ongoing inflation of early-stage round sizes. Through the end of September, 50% of all capital invested this year has been in deals of $25 million or more in size—the highest percentage seen to date. In 2013 and 2014, the share of capital invested in $25 million+ deals never eclipsed 40%, only approaching that proportion in one quarter, but this year is clearly a different story. The rise in valuations across all stages, declining deal counts and the elevation in capital invested all signal that early-stage VC is moving into even riskier territory than normal. More than 43% of all early-stage deals made in 3Q were

$25M+


$5 million or more in size. Cries over a possible valuation bubble may encourage caution regarding deal sizes, though the pace could stay intense as founders vie for

as much capital as possible and plenty of early-stage funds have been raised. Over 6,000 angel/ seed fundings have occurred since the start of 2014, after all. 7 P I TC H B O O K 4 Q 2015 U. S . V E N T U R E I N D U S T RY R E P O R T

Late Stage U.S. LATE STAGE ACTIVITY BY QUARTER $16


$14

467

$12

391

$10 $8

600

546

# of Deals Closed

353

383

394

444

419

500

446 426

424

403 399

362

343

448

441 435

420 405

416 359 350

400 300

$6

200 $14.1

$12.5

$10.5

$12.5

$7.8

$12.8

$7.4

$6.1

$6.4

$5.6

$5.8

$5.3

$5.8

$6.2

$6.1

$5.2

$6.6

$6.6

$7.5

$4.2

$3.7

$0

$5.2

$2

$3.9

$4 100 0


2011

2012

2013

2014


LATE STAGE $ INVESTED BY ROUND SIZE 100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

Under $500K

$500K-$1M

$1M-$5M

$5M-$10M

$10M-$25M

2015*

2014

2013

2012

2011

2010

2009

2008

2007

0% 2006

At this point, context bias comes into play when analyzing the sheer flood of late-stage dollars. In light of three recent quarters clearing the $10 billion threshold, the $14.1 billion capital invested at the late stage in the third quarter may not seem quite as huge. But that sum is about double any quarterly total from 2010 to 2013. Adding up quarterly sums, we arrive at about $70.2 billion total poured into latestage rounds since 2Q 2014. The number of late rounds has declined, falling to levels last seen prior to most of 2011, but capital invested roared ahead regardless. Over 80% of capital invested at the late stage in 2015 has been in rounds of $25 million or more, at least 20% above historical norms—excepting 2014. These numbers are hard to examine without a few warning bells going off. It’s worth reiterating that many nontraditional venture firms are involved and some of these heavily financed companies have achieved impressive growth.

$25M+


Others haven’t—as many have pointed out, unit economics are a problem. How patient investors will be as time wears on is a question that will remain. Venture capitalists can afford to be patient for a time,

although not that long, given it’s the late stage. As for nontraditional venture investors, they often do not need nearly as impressive of returns, which is good, as high returns could be hard to find. 8 P I TC H B O O K 4 Q 2015 U. S . V E N T U R E I N D U S T RY R E P O R T

Women Founders FINANCINGS OF U.S. COMPANIES FOUNDED BY WOMEN $9.0

Capital Invested ($B) Deal Count (#)

$8.0 $7.0

14%

14% 12%

11%

10%

9%

14%

1,164

1,200

992

1,000

$6.0 $5.0

645

789

$4.0 $3.0

400

$4.6

$6.7

$8.3

$0.0

$4.0

$2.0 $1.0

2011

2012

2013

2014

2015*

11%

noting the growth of companies founded by women is keeping pace with the industry as a whole. In 2015, they have seen median step-up multiples in round size outpace the

15%

15%

typical venture-backed company by an appreciable margin. Stay tuned for more coverage on this topic upcoming on the PitchBook Blog.

2.0x

14%

1.8x

10%

8% 1.4x

1.5x 1.5x

1.5x

1.5x 1.5x

1.4x

% of Capital Invested

4%

1.6x

1.5x

1.3x 1.2x

% of Deals

2%

0

MEDIAN STEP-UP MULTIPLES IN ROUND SIZE

1.6x

6%

200


1.8x

10%

800 600

WOMEN-FOUNDED COMPANIES’ % OF TOTAL VC INVESTMENT 16%

1,400

1,309

$3.7

Despite increasing success in attracting venture dollars, companies founded or cofounded by women still account for a very minor portion of capital flow. Through the end of 3Q, female founders in the U.S. have received $8.3 billion of venture funding across 789 deals in 2015, 14% of the total capital invested by venture firms this year. While the total sum of capital raised outpaces 2014 handily, with a full quarter left to go, it is still a very small portion of the market. When looking at past numbers, the growth in financings of women entrepreneurs has been considerable, with the number of investments more than doubling and capital invested increasing by 81%. Compared to the industry as a whole, however, the end results are still clearly disproportionate. The lack of diversity in venture capital portfolios has become increasingly noted, which has doubtless helped and may spur even more funding of female entrepreneurs. It’s worth

All Companies

Female Founders

1.0x

0% 2011

2012

2013

2014

2015*


2011

2012

2013

2014

2015*



Activity by Sector U.S. VC ACTIVITY (#) BY SECTOR 100%

Other

90%

Software

80% Pharma & Biotech

70% 60%

Media

50%

IT Hardware

40% 30%

Healthcare Svcs/Suppl./Syst.

20%

Energy

10%

Consumer Goods & Recreation 2015*

2014

2013

2012

2011

2010

2009

2008

2007

2006

0%

Commercial Services Source: PitchBook *As of 9/30/2015

U.S. VC ACTIVITY ($) BY SECTOR 100%

Other

90%

Software

80% Pharma & Biotech

70% 60%

Media

50%

IT Hardware

40% 30%

Healthcare Svcs/Suppl./Syst.

20%

Energy

10%

Consumer Goods & Recreation 2015*

2014

2013

2012

2011

2010

2009

2008

2007

0% 2006

What precisely constitutes a sector can, at times, become tricky in the margins. To best represent VC investment trends by sector, we’ve recently tinkered with some of our categories, expanding healthcare and consumer and adding energy and IT hardware, among other shifts. Some things haven’t changed: Software is still predominant in terms of both number and value of rounds, with over 2,000 financings raising $22.7 billion in 2015 to date. Those figures constitute about 40% of all 2015 activity thus far and close to 40% of all venture dollars. Given the rapidity of lowering costs and evolution of delivery models within software, not to mention the growth in total accessible market, its popularity as an investment destination makes sense. The waning fortunes of IT hardware differ in that upfront costs lend a considerable advantage to incumbents, hence its decline relative to software. One intriguing question that arises is whether the sheer proportion of dollars flowing to software alone makes sense in the long term, with regard to innovation. The relative lack of money in energy and hardware suggests those sectors are underfunded—although given the risks in energy, its totals make sense—which could pose problems for crucial niches. For example, the semiconductor industry is still transitioning to 10-nanometer manufacturing— but even though sevennanometer working samples may exist, what lies beyond? This is a few years down the road, but that is what venture capital is all about.

Commercial Services Source: PitchBook *As of 9/30/2015


Q: In today’s overheated environment, how do you contend with the trend of even early stage financings and valuations overinflating?

Will Kohler Partner Lightspeed Venture Partners Will joined Lightspeed in 2014 and focuses on investments in the areas of SaaS solutions, enterprise IT, and cloud-based services and applications. Will has over 10 years of venture capital experience and before entering venture capital he co-founded and was an Operations Manager at Pointe Communications (d/b/a PointeCom), a facilities-based Integrated Communications Provider that grew to over $40 million in annual revenues and was later acquired. Prior to joining Lightspeed, Will worked at Summerhill Venture Partners where he led investments in cloud-based services and applications and SaaS solutions. His selected investments include C2FO, Cargo Metrics, and Sonian Networks. For the seven years prior to joining Summerhill, Will was at Prism VentureWorks, where he led or supported investments in software & services, cloud computing and digital media companies. His selected investments include Collation (acquired by IBM), Conduit Labs (acquired by Zynga), ExpoTV, LogMeIn (LOGM), and Sonian Networks.

A: We typically form an investment thesis in an area after lots of work and experiences. So when we’re fortunate enough to get in front of exceptional entrepreneurs that share the same vision, we hope to compete on more than just price. This may sound like lip service, but companies have to grow into their valuations over time and our job is to work with entrepreneurs to help make that happen. What metrics do you consider most carefully when looking at potential investments nowadays? How are you assessing risk in today’s climate? Lightspeed invests across enterprise and consumer so there are specific metrics we focus on depending on the stage of the company and the go to market approach. But in the early days, we try not to complicate things; great people building products customers are desperate to use and pay for (potentially down the line). There’s obviously more to it, but the culture of many great companies was set embracing the surprises that come while solving for that. We assess risk at various levels with the goal of understanding where the uncertainties lie: macro environment, regulatory, ability to hire and retain talent, competition, durability of the model. In particular to today’s climate, we pay attention to what is needed to grow into and beyond the lofty valuations in the market both as an existing and potential new investor. There seems to be growing awareness for potential cap table gridlock in underperforming companies and certainly for technology publics trading at a discount. Even at the early stage, have you been implementing any extra terms in your deals? We have not implemented extra terms in our deals.

What’s your take on the apparent bifurcation in venture fundraising, where many seed funds are being raised while at the other end of the spectrum traditional VCs are setting up growth funds to capture more pre-IPO value? We’ve seen parts of this movie before but like most recurrences the second or third time around are more pronounced. One effect has been that due to increased competition, seeds now look like Series As used to, Series As look like Series Bs used to, and so on—both in valuations and amounts raised. We’re also seeing seed funds raise larger funds for the same reasons that traditional VCs are setting up growth funds—own more of the winners. In the past, this bifurcation led to investing opportunities in companies in the “knothole” stage, with early signs of product/market/fit but not hitting the metrics that excite growth funds. With so much capital in the system, we’ll see if those opportunities exist. Do you think those growth funds will be hit hard if the tech market hits a bear cycle and nontraditional venture investors cease joining late-stage rounds? Or what do you anticipate occurring in the late-stage space? Late-stage investing approaches are designed to be opportunistic, strategic, or long-term oriented, and firms are structured differently depending on their approach and will adjust to a down cycle accordingly. The bestperforming portfolio companies will continue to be funded, but it will take some time for the middle ground to play out given the large cash balances and varying expectations in the cap table. For us, we believe the best way to drive impact returns for our investors is to invest early, obtain high ownership and take a lead position in a theme we have conviction in. Roughly 85% of our investments are seed, Series A or B. >> To read the full interview, which goes on to discuss investments in consumer or enterprise and underfunded sectors, click here.>>


Exits Overview U.S. VC EXITS BY QUARTER $45

Capital Exited ($B)

$40 $35

$25

169

162

$20

250

239 238

230

199 199

226

200 189

170

161

148

260

235

202 199

181

250

237

236

216

201 206

$30

300

# of Exits

150

$15

100

$10 $13

$15

$13

$42

$21

$14

$15

$14

$11

$8

$4

$12

$11

$24

$7

$9

$8

$14

$9

$10

$7

$5

$0

50 $7

$5

0


2011

2012

2013

2014


U.S. VC EXITS BY YEAR $100

Capital Exited ($B)

$90

987 853

$70 680

$60

1,000

870 800

718 645

587

$50 $40

1,200

# of Exits

$80

600

472

493

450

$30

400

$20 $41

$92

$38

$53

$40

$28

$14

$23

$0

200 $43

$10

$25

U.S. venture exit activity is diminishing slowly but steadily. A 16% decline in exit counts between 2Q and 3Q was observed. Exit value in 3Q was stable at $13 billion—around the quarterly level seen over the past two years—and yearly totals seem healthy, so those eyeing current liquidity options in light of late-stage valuations may seek reassurance in those yearly numbers rather than the past few quarters. After all, the ramp-up in completed exits from 2010 to 2014 was steep, with a huge $251 billion in total exit value achieved. But the fact remains that if 4Q 2015 numbers are anything like the third quarter’s, 2015 will see the lowest total of exits since 2011. Overall exit value may have been relatively healthy thus far into the year, but does it measure up to overall capital invested and valuation levels, especially at

0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* Source: PitchBook *As of 9/30/2015

the late stage? With $14.1 billion invested at the late stage alone in 3Q, it’s hard to see how it does. In short, historical exit numbers do

not show much evidence of the liquidity necessary to justify many of the valuations currently seen in the market.


Exits by Type Strategics’ appetite for venturebacked companies is waning. 3Q saw 152 corporate acquisitions close, the lowest quarterly sum since 2Q 2013 and a 16% slide YoY compared to 3Q last year. At $9.4 billion, exit value through that ramp wasn’t much rosier. 2015 as a whole will still post the second-strongest total of capital exited through M&A since 2006, but

The surest exit ramp for startups— M&A—seems to be on the decline.

VC EXITS & CAPITAL EXITED BY TYPE $100

800 Source: PitchBook *As of 9/30/2015

$90

$3.9

700

$10.7

$80

600

$77.7 $70 510 $60 $2.6

$50 $40

$5.0

$30 $20

$1.2 $4.0 $19.6

$3.4 $6.2

$30.3

$1.3 $30.4 $28.9 $3.8

$2.4

$23.3

$20.3 $1.2 $11.9

$10

400

$21.6

$7.3

500

$2.7 $3.3

$6.3

$9.2

$31.7

300

200

$25.2

78

100

57 $0

0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* Acquisition ($B)

IPO ($B)

Buyout ($B)

Acquisition Count

IPO Count

Buyout Count

the declines do forecast a turn of the tide in response to overheated valuations, which poses a problem for investors seeking an exit. M&A has been the surest and most preferable exit route for VC-backed startups historically—even more so in today’s public markets climate. Through the end of September, 57 venture-backed companies have gone public, raising a total of $6.3 billion in their initial debuts. A brief uptick of 29 IPOs in 2Q was only contrasted by the 15 completed in the third quarter, for a total of $2.4 billion. The stock markets of late have been punishing enough of companies with far healthier balance sheets than many mature, VC-backed companies that, had the conditions of 2014 persisted, would likely be listing. Private markets are a safer haven for now. Looking ahead, it’s difficult to assess if the current state of affairs will shift. Growth is still priced at a premium—likely helping discourage potential strategic buyers—so even though it is softening, corporate acquisitions should persist at a decent clip. What’s more dubious is a fourth-quarter resurgence in public debuts. The trickle of biotechs completing IPOs is unlikely to slow, but it will remain just that, a trickle. Other than Square’s potential debut, there isn’t much in the pipeline for tech. Pure Storage (NYSE: PSTG) ended its first day of trading about 5.8% below its initial price and about 13% below its last private valuation, which is hardly encouraging, although, as one data point, shouldn’t be taken as too significant. But it may well be taken as evidence that for VC-backed companies, going public remains a chancy prospect.


Exit Trends U.S. VC INVESTMENTS/EXIT RATIO

From 2011 to 2013, the extent of VCs’ optimism can be gauged by the boom in the investment/ exit ratio. The most recent numbers illustrate that things have been shifting, however. Exit and financing tallies have been slumping, as we’ve seen, with the latter the primary culprit when it comes to the declining ratio. Looking at exit sizes and valuations, another cause of declining financing activity emerges. Median exit valuations for IPOs would seem sufficient for many VC-backed startups to cash out at a decent multiple for their investors. Even the $285 million median seen in 2015 to date, however, would be disappointing for quite a few heavily financed startups. Corporate acquisitions have seen fairly stable median exit valuations but, again, aren’t anywhere close to the level necessary for many late-stage startups nowadays to pull off a strong exit. It should be noted again that quite a few nontraditional venture firms have been contributing to the surge in private valuations that compares poorly to the numbers

10,000

12x

8.5x 8x 6x

8.5x

8.3x

8.8x

7.0x

6.8x

6.2x

9,000

9.3x

9.7x

10x

2,000

2x

645

0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* Investments/Exits

# of Investments

# of Exits Source: PitchBook *As of 9/30/2015

below, and they don’t need anything like the returns VC firms typically require. Plus, some VCs are likely exiting in part through late stage rounds. So the boom at the late stage could continue, although it is increasingly hard to see how precisely liquidity will occur for many.

The disparity in investments to exits necessitates a boom in liquidity down the road.

$88

$318 $285 $277

$250

Acquisition/Buyout

$0

$70 $50

$50 $38

$25

$60 $54 $46 $40

$87

$80

$80

$360

$300

$100

1,000

0x

$426

$200 $232

5,000 3,000

$100

$258

6,000 4,000

$500

$334

7,000

4x

MEDIAN EXIT SIZE ($M)

$342

8.0x 5,162

MEDIAN EXIT VALUATION ($M)

$400

8,000

$81

$75

$72 $54

$52

$47 $37

$77 $67 $60

$45

$37

$50 $38

IPO $68 $46

$59 $57 $44

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* Source: PitchBook *As of 9/30/2015

$20

$25 Acquisition/Buyout

IPO

$0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* Source: PitchBook *As of 9/30/2015


Exit Trends Just how many companies remain private that have been heavily capitalized, and need to achieve an impressive exit, is the question. In the chart to the right, we’ve broken down the proportions of companies that exit via IPO by the amount of venture capital raised. From 2006 through the end of September 2015, 49% of companies that raised $100 million or more have gone public during that timeframe. Over 400 companies founded since the start of 2000 that have raised $100 million+ in VC remain privately held. Since 49% of companies that raise that much have gone public since 2006, the IPO pipeline is sputtering on empty at best. But, on the other hand, M&A is the most popular exit route, so perhaps the top acquirers of VCbacked companies will step in. But, as the chart and table below illustrate, even the top 10 corporate buyers of venture-backed startups aren’t that active. Facebook’s acquisition of WhatsApp is the only purchase that comes close to what the upper tier

% OF VC EXITS TO IPO BY VC RAISED 60% 49.0%

50% 34.9%

40% % Exit via IPO 30%

21.4%

20% 8.0%

10% 0%

2.0%

1.6%