US TECH FUNDING - WordPress.com · 2015-11-15 · 61 US tech “unicorns” (private company with >$1bn valuation). 75% of the largest VC investments have been raised in the last

US TECH FUNDING

M o r g a n B e n d e r , B e n e d i c t E v a n s , S c o t t K u p o r J u n e 2 0 1 5

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What’s going on in the public markets?

What are all these “unicorns”?

What’s going on in venture capital?

Disclaimer: This is not an investment recommendation

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0

20

40

60

80

100

1980 1985 1990 1995 2000 2005 2010

US tech IPO & private funding ($bn)

The starting point – what’s going on? 34 years of US tech funding

Source: Capital IQ, Jay Ritter, University of Florida, NVCA, a16z

IPO

Private

2014

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0

20

40

60

80

100

120

140

1980 1985 1990 1995 2000 2005 2010

US tech IPO & private funding ($bn, 2014 dollars)

…inflation adjusted (Can you spot the bubble?)


IPO

Private

2014

The argument against a tech bubble

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0

200

400

600

800

1,000

1,200

1,400

1990 1995 2000 2005 2010 2015

S&P IT index (adjusted for inflation)

Tech market indices are approaching the levels of 1999…

Source: Bloomberg

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40

50

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0

200

400

600

800

1,000

1,200

1,400

1990 1995 2000 2005 2010 2015

Forw

ard

P/E

mul

tiple

Inde

x pr

ice

S&P IT index (adjusted for inflation)

But, earnings, not P/E multiples, are growing This time, profits are driving returns – in fact, P/E multiples are at early 1990s levels

Source: Bloomberg

Forward P/E multiple

Index

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1980 1985 1990 1995 2000 2005 2010

Num

ber o

f IPO

s

IPO

fund

ing

($bn

) US tech IPO funding ($bn, 2014 dollars) and number of IPOs

And tech IPOs are essentially dead The tech IPO market is at early 1980’s volumes

Source: Jay Ritter, University of Florida

IPO funding

Number of IPOs

2014

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IPO volumes are at 35-yr median levels

Source: Jay Ritter

53 in 2014

vs. 632 in ’99-’00

vs. 514 from ’01-’14

vs. 50 median from ’80-’14

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0%

5%

10%

15%

20%

25%

30%

35%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

S&P IT index market cap as % of S&P 500 market cap

Tech’s contribution to S&P is flat Public tech companies’ share of the overall US stock market is stable for 14 years

Source: Bloomberg

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0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1980 1985 1990 1995 2000 2005 2010

US tech funding (IPO + private) as % GDP

As is tech funding’s share of GDP Steady growth in funding reflects the scale of the opportunity

Source: Capital IQ, Jay Ritter, University of Florida, NVCA, BEA, a16z

2014

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0

1

2

3

4

5

1995 2000 2014 2020

Billion people online

But, market size is for real this time The internet is working now – from 40 million people online to 4 billion

Source: ITU, a16z

Smartphones

People online

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$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Tech funding per US internet user ($, 2014 dollars)

Funding per person online US funding per internet user is down 80% since the Bubble

Source: Capital IQ, ITU, US Census, a16z

Public $ / user

Private $ / user

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50

100

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300

350

400

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

US online revenues ($bn, 2014 dollars)

People are spending (lots of) money online US ecommerce + online ad revenue has increased ~15x since 1999

Source: US Census Bureau, IAB/PwC, a16z

Online advertising

Ecommerce

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500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

US retail revenue ($bn, 2014 dollars)

And there’s more to come Ecommerce is still only 6% of US retail revenue – far more room to grow

Source: US Census Bureau, a16z

Ecommerce

Retail ex. Ecommerce

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“It’s different this time.”

*2014 dollars, venture & IPO. Source: Capital IQ, Bloomberg, BEA, ITU, US Census, Jay Ritter, University of Florida, a16z

1999 2014

US tech funding $* $71bn $48bn

Funding as % US Tech GDP 10.8% 2.6%

S&P IT index forward P/E 39.0x 16.1x

Global internet population 0.4bn people 3bn people

US ecommerce revenues* $12bn $304bn

Number of IPOs 371 53

Median time to IPO 4 Years 11 Years

The unicorn hunt is a big difference

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The headlines are ominous. 61 US tech “unicorns” (private company with >$1bn valuation). 75% of the largest VC investments have been raised in the last 5 years. So, what’s going on?

Source: Capital IQ, CB Insights, a16z

1 Companies are

staying private longer.

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Time to IPO is significantly elongated

Source: Jay Ritter

vs. vs. vs. 11 Years in 2014

7 Years pre-bubble

10 Years post-bubble

4.5 Years in the bubble

2 Quasi-IPOs are replacing real IPOs

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4

6

8

10

12

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Aggregate funding for top 20 US tech private deals ($bn, 2014 dollars)

Yes, there is more funding for larger deals The top 20 private deals have suddenly become very large

Source: Capital IQ, a16z

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2

4

6

8

10

12

14

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Aggregate funding for top 20 US tech deals ($bn, 2014 dollars)

But, this is just a rebalancing from IPOs The top 20 deals used to be mostly IPOs – now they’re almost all private


IPO

Private

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1980 1985 1990 1995 2000 2005 2010

US tech IPO & private funding

IPOs used to be the norm – but no more For most of the ‘90s the majority of tech funding was public – this has reversed


IPO

Private

2014

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0

50

100

150

200

250

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Median revenue at IPO ($m, 2014 dollars)

The bar for an IPO is now much higher It used to be routine to hit $20m revenues and go public – not any more

Source: Jay Ritter, University of Florida

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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

US tech IPO vs. quasi-IPO late-stage rounds ($bn, 2014 dollars)

Mix shifted from IPO to late-stage rounds Quasi-IPOs are now 75% of investment dollars vs. 40% in the bubble


Private $40m+

IPO

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40

60

80

100

120

140

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

US tech IPO versus quasi-IPO late stage rounds ($bn, 2014 dollars)

Public and private tech funding merge And at modest levels – even combining public and private financing


Private $40m+

Private $1-40m

IPO

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140

1997 1998 1999 2000 2011 2012 2013 2014

US IPO and private tech funding by round size ($bn, 2014 dollars)

The funding surge is in late-stage only The funding explosion in 1999-2000 was at every stage – in 2014 it isn’t


Private $40m+

Private $1-40m

IPO

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0 1 2 3 4 5 6 7 8 9 10+

Total private + IPO funding by company age at funding, 1995-2014 ($bn, 2014 dollars)

Which is a good thing The bubble saw a surge of funding of very young companies that’s not been repeated


1999–2001

2012–2014

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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Total US tech funding by age cohort ($bn, 2014 dollars)

55% of bubble $ to <2 year old companies Versus 80% of current funding going to +3-year-old companies


0-2 years old +3-year-old

Why the shift from IPOs to Quasi-IPOs?

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Initially out of necessity - post-bubble nuclear winter + GFC.

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But, now out of desire

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What’s behind this desire to stay private?


•  It’s hard to be a (small cap) public company

•  The “growth mantle” has been passed to the private market

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The “tech inversion” – large cap incumbents


•  ~$2.6 trillion market cap in little/no growth incumbents

•  The (un)holy marriage of activists and value investors

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The “tech inversion” – IPO, new incumbents


•  ~$750 billion market cap created by ‘10-’15 IPOs

•  But, 2/3 = Facebook / Alibaba

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The “tech inversion” The “buy in the last round pre-IPO” strategy is generally working


•  Averaging down cost basis (mostly)

•  Implicit call option at IPO allocation

•  Implicit put option on IPO pricing (e.g., Hortonworks, New Relic, Box, Zendesk)

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Thus, as returns migrate to private markets Tech returns used to be in public markets – have now shifted to private

* Market cap at IPO. Source: Capital IQ

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20%

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60%

80%

100%

Apple (1980)

Microsoft (1986)

Oracle (1986)

Amazon (1997)

Google (2004)

Salesforce (2004)

LinkedIn (2011)

Yelp (2012)

Facebook (2012)

Twitter (2013)

Private versus public market value creation for select public US tech companies

Public value creation* Private value creation

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Almost all the returns are now private Old world tech giants returned plenty in public markets – new ones have not

Note: see endnotes for methodology. Source: Capital IQ, Pitchbook, Quora, a16z

0x

200x

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600x

800x

1000x

1200x

Apple (1980)

Microsoft (1986)

Oracle (1986)

Amazon (1997)

Google (2004)

Salesforce (2004)

LinkedIn (2011)

Yelp (2012)

Facebook (2012)

Twitter (2013)

Private versus public market return multiples for select public US tech companies

Public value creation Private value creation

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Facebook (2012)

Twitter (2013)

LinkedIn (2011)

Yelp (2012)

Implied market cap with similar post-IPO returns to Microsoft ($tr)

And you can’t make it back by waiting For Facebook to match Microsoft’s public market returns, it would need to be worth $45tr

Note: Calculated from market cap at first close post-IPO. Source: Capital IQ, BEA

Current US GDP

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20

1998 2000 2002 2004 2006 2008 2010 2012 2014

Number of top 20 US tech deals with participation from non-traditional investors

Investors are following suit Non-traditional private investors drive growth rounds


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And more capital is likely to continue to flow into the private markets

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The VC half-truth


•  Half-truth: It’s cheaper to start a company today

•  But also true: It’s more expensive to win … and the money is needed earlier in a company’s lifecycle

•  And, most importantly, the payoff from winning is larger than ever!

Meanwhile, back in venture capital…

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1970 1975 1980 1985 1990 1995 2000 2005 2010

US tech VC fund inflows ($bn, 2014 dollars)

No surge in VC fundraising

Source: NVCA, a16z

VC funding is growing moderately

2014

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VC inflows are modestly higher But well below the Bubble excesses

Source: NVCA; inflation adjusted

vs. vs. vs. $26B in 2014

$19B median in ‘08-’13

$62B in 1999

$99B in 2000

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And relative to output, fundraising is down VC funding as a percentage of tech GDP is down by half from 1980

Note: Value-added Tech GDP used for Tech GDP. Source: BEA, NVCA, a16z

0%

3%

6%

9%

12%

15%

18%

1980 1985 1990 1995 2000 2005 2010

US tech VC fund inflows as % of tech GDP

2014

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40

60

80

100

120

140

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Dollars raised by round cohort and year ($bn, 2014 dollars)

Large rounds raise lots of money (obviously) Overall dollars raised are dominated by quasi-IPOs (which arguably aren’t even really VC)


Private $40m+

Private $25-40m

IPO

Private $10-25m

Private $1-10m

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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Dollars raised by round cohort and year ($bn, 2014 dollars)

Funding looks more moderate elsewhere The total money going into deals under $40m is back to 2001 levels


Private $25-40m

Private $10-25m

Private $1-10m

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4.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Companies raising rounds by round cohort and year (000s)

Late-stage is a small part of the ecosystem But things are changing elsewhere, as the number of companies raising capital has doubled since 2009


Private $40m+

Private $25-40m

IPO

Private $10-25m

Private $1-10m

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0%

50%

100%

150%

200%

250%

300%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Indexed US tech funding for $1m-$40m rounds (2014 dollars)

More rounds, smaller rounds 2.5x more rounds while the round size dropped by a third – the mix is shifting


Average round size

Number of rounds

Aggregate $ raised

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1,000

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Number of rounds by cohort

Cheaper to start companies = seed growth $1-2m rounds have increased over 7x in the last decade (and this data probably doesn’t capture all of them)


$3-6m rounds

$1-2m rounds

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Aggregate US tech investment by round size cohort ($bn, 2014 dollars)

But absolute seed dollars remain small Amount raised in $1-2m rounds is up 7x over 10 years, but still only $1.1bn (~5% of all sub-$40m deal funding)


$1-2m rounds $3-6m rounds

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2,500

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Number of US tech deals by company age at round

Deal volume is back up… More tech companies are being created


0-2 years old +3-year-old

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250%

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350%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Indexed US tech funding for 0-2 year old companies (2014 dollars)

…As the cost of company creation is falling


Average round size

Number of rounds

Aggregate $ raised

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Less money, more money Which one do you want to believe? Both!

Order of magnitude reduction in the cost of creating a software company

Shift from expensive hardware and software to cloud, open source, GitHub, etc.

So, more company creation, more rounds, smaller round sizes

The seed surge

It’s never been cheaper to create software companies

Funding is cheap

But scaling to address 3bn people is not

War for talent (and office space) in SF

Round sizes for hot deals have moved upwards

But scaling to address the opportunity costs money

What could possibly go wrong?

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Some potential guideposts


•  IPO volume/maturity

•  Private funding/maturity

•  LP inflows (and quality)

•  Tech’s valuation & contribution to GDP/S&P 500

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And, of course, global macro!

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741

374 369

277 212 199 171 151 151 145

111 77

40 38 29

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Market Cap ($bn)

In the meantime – if you are investing for growth – what would you rather own?

Note: Market cap data as of 6/5/15. Source: Capital IQ, CB Insights

All 61 $1bn+ US tech

“unicorns” as of 6/9/15

All $1bn+ US tech

“unicorns” ex Uber

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A note on data

Sharing the perspectives and analyses presented in this deck required a time series of overall funding. However, there is no source of comprehensive (let alone granular) deal-level data that goes back before the late 1990s. Therefore, we were obliged to vet and combine incomplete data from multiple sources.

Where some data sets were more comprehensive on broad parameters but limited in historical range, others were broader than our definitions of software tech (e.g., they included medical devices). There were other screening differences as well; for example as larger deals became more commonplace but were not referred to as “venture” funding, we looked to a different source that would allow us to roll up that deal-level data as shown in this deck.

To ensure as much rigor as possible in sourcing our data, we compared data from several sources against each other and then collated and de-duped it into a master data set for a few years which we then checked for accuracy across each of those sources to determine the best ones. While there are many caveats (and counterarguments!) we could make about the data given various tradeoffs, here are some of the key things to note when reviewing this deck:

1. Historical transaction-level data is much more robust after 1996 than before it. We also had to fuse together different data sets, using Jay Ritter & NVCA before 1996 and Capital IQ after 1996 and merging them at the join.

2. The data set for age at funding is not complete and becomes less complete the further back we go, especially before 1996. From 1998 to 2001 we are also missing founding year data for 20% of deals, versus 3% for later deals. The missing companies will skew heavily to small and/or young companies, so adding this data would show an even greater swing than the one we point to in this presentation.

Notes for slide 30: Microsoft, Oracle & Amazon Series A valuations assumed at $3m for illustrative purpose; Series A to IPO represents return multiple from Series A valuation to market cap at first close post-IPO

Documents

US TECH FUNDING - WordPress.com · 2015-11-15 · 61 US tech “unicorns” (private company with >$1bn valuation). 75% of the largest VC investments have been raised in the last