Adding nuance to VC narratives
In the wake of our other venture-focused reports, this report poses an intriguing challenge: How best to analyze ongoing themes that have already been established and discussed, in light of the far more detailed datasets now available?
The best solution to this quandary remains, as ever, in detailing the nuances of such narratives, paying heed to the resulting modifications and acknowledging further layers of complexity. This report offers a rich display of venture capital valuations data, broken down by series, sector and more, to complement our typical datasets of financing activity. In addition, it revisits the topic of hedge and mutual fund participation in venture rounds, delving into the latest statistics on such involvement. Peppered in amongst updated data are also fresh, relevant sets of numbers, such as a look at the number of venture-backed companies that exited at valuations less than those of their immediately prior round of financing. In addition, we have a brand-new section focused upon trends in liquidation participation, which contains data on the proportion of non-participating preferred versus participating by stock series over time.
In short, this is our most expansive VC Valuations Report yet, and we hope it aids you as you conduct your own analysis of current market trends. If you have any questions or comments, feel free to reach out to us at [email protected]
GARRETT JAMES BLACK
VC Valuations – The new normal
Taking stock of the venture landscape as the midpoint of the year recedes into the past, it’s undeniable that there has been a reset. Not a reset to an extent matching the overwrought tenor of discussion seen in February when tech stocks plunged, or even the grim, foreboding warnings of how overvalued many unicorns were, but one of moderation. The crux of the matter is the rate of the reset. Has it ground to a halt or is it still progressing slowly?
Venture investors have significantly dialed back their pace, with early-stage activity diminishing considerably still. Jitters around the actual health of the US economy remain in place—however reasonably—given August’s jobs report and a volatile political climate.
Those fears have contributed to more assiduous assessment of companies’ resilience, while an even shakier global growth rate complicates matters for mature venture-backed enterprises looking to expand operations and customer bases overseas.
On top of macroeconomic factors, the late-stage phenomenon wherein mature companies stay private and round sizes plus valuations remain persistently high is by and large still present. To recap conclusions from prior reports, such a late-stage focus is to be expected in a capital-rich environment marked by uncertainty, with investors doubling down when justifiable. More detailed analysis and breakdowns of valuations data are in later sections, but the overall figures below underline those initial points well. In addition, the climate hasn’t affected financing terms too much, judging by the fact median percentages acquired have flatlined in some cases and inched upward incrementally otherwise.
So has the reset paused? No. The reset is ongoing, in a pace that is typical of private investment markets. Given their relative opacity, private markets as a matter of course absorb information and respond more slowly than their public counterparts. VC cycles are no different.
In a persistently low-real growth environment after a boom period for venture investment and liquidity, money will still pour into the coffers of VC firms until they cease to outperform safer alternatives.
On a private market timeline, the charts to the left give rise to both optimism and caution. Taking the trends with a grain of salt due to small sample sizes, last year did see an elevated number of companies exit at values lower than their prior financing, speaking to concerns about overblown valuations that deflate upon closer scrutiny by public market investors or corporate acquirers. At the same time, for those companies that were preparing to exit, median financing sizes hit a median of $7.6 million in the first seven months of 2016, an all-time high. Furthermore, valuations close to liquidity events remain historically high.
Such exit rates, particularly in light of heavy hype around tech M&A, elucidate the status of the VC reset quite well. In short, since some companies are still able to exit at decent multiples for their investors but overall selling activity is declining, with a few notable misfires, VCs are hard-pressed to balance their hoards of capital with potentially lengthening liquidity timelines, wondering how to maintain the elevated returns recently posted. As the recent debate around Andreessen Horowitz’s rate of return illustrates, what actually are good returns may in the end be best judged by whether limited partners recommit. In current public markets roiled by volatility even as they roll higher and higher, what VC fund managers need to return to please LPs may not be as high as once thought. On the other hand, such vast sums have been invested that a fair number of hefty exits are needed. Thus, bringing the rumored tech M&A boom to fruition or sustained healthy activity in that sector—which looks set to continue given corporates’ incentives—will remain the deciding factor. And that, in turn, is what will shift the pace of the ongoing reset in the venture industry. Until then, it will continue to grind slowly into a subdued, uneasy equilibrium.
After concerns of a valuation bubble in the venture industry caused fear and potentially some panic across the venture landscape at the end of 2015 and the beginning of this year, the median valuation data from 2016 lends to a slightly different narrative of what has actually happened. It’s true that completed financings and exits have slowed, as investors have revamped their investment criteria and taken a breather after a voracious couple years of dealmaking, but amid these industry changes, valuations have generally held steady through the first eight months of the year, with continued growth coming in Series C and Series D+ rounds.
While this may come as a surprise to some, there are several factors that have led to the sustained high levels of company values. Looking especially at the early stage, investors have taken the recent bubble talk to heart and shifted their tactics for investments. Demonstrated success in the form of revenues and users is becoming more and more a focal point in the search for deals, in turn leading to investments in well-developed companies worthy of a higher valuation. There is also no shortage of capital available for deployment, as commitments to funds have hit historical highs during 2016. The excess levels of capital in funds may have caused the beginning of the perceived “valuation bubble,” but they are actually being put to work in the form of