View
385
Download
2
Category
Preview:
Citation preview
State of the Markets Shifting Investor Sentiment Drives Recalibration April 2016
Written by SVB Analytics:
Steve Allan, CFA Head of SVB Analytics
Sean Lawson Manager
Steven Kakowski Associate
Steven Pipp Associate
John Ortelle Manager
What does the rest of 2016 hold for the innovation economy? SVB Analytics took a look at how we got here to help inform where we may be headed. In the second quarter of 2016, we anticipate lower public valuations, a continued IPO drought and a refocus on profits instead of growth at all costs. After the rapid run-up of the past two years, we see this as a healthy recalibration. Our review also shows that since the beginning of 2016, VCs continue to raise impressive amounts of capital, debt remains cheap and private valuations are strong (even if recent IPOs currently struggle in the public markets). That said, the late-stage mega-rounds characteristic of 2014 and 2015 appear to be a thing of the past as investors look for more protection for their investments. This is leading to investors requiring tighter terms and companies adopting leaner operations. As with any review of the markets, conditions can turn quickly. We are, however, confident that the fundamentals driving innovation are alive and well in 2016. Steve Allan, CFA Head of SVB Analytics
The Innovation Economy in 2016
State of the Markets
State of the Markets 3
1 Macro Environment
2 Valuations
3 Exits
4 Key Takeaways
State of the Markets 4
Macro Environment
Capital Is Still Cheap
State of the Markets 5
With interest rates remaining near record lows, investors scour the markets for returns
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2000 2002 2004 2006 2008 2010 2012 2014 2016
5-Year Nominal Interest Rate
U.S. Treasury 5-Year Constant Maturity: January 2000 – March 2016
Source: S&P Capital IQ
Companies Are Stockpiling Cash
State of the Markets 6
S&P 500 companies’ cash as a percentage of assets approaches 11 percent, indicating that companies remain risk averse in the post-financial crisis environment
Quarterly Cash and S.T. Investments – S&P 500 (Ex – Financials): Q1 2007 – Q4 2015
4%
5%
6%
7%
8%
9%
10%
11%
12%
$0.3
$0.5
$0.7
$0.9
$1.1
$1.3
$1.5
Cash and S.T. Investments Cash as a % of Total Assets
$ Tr
illio
ns
% o
f Ass
ets
Source: S&P Capital IQ
Volatility Was Relatively Low Until Mid-2015
State of the Markets 7
Markets saw a sustained period of calm for nearly three years, from 2012 to 2015
Source: S&P Capital IQ
^VIX: March 2008 – March 2016
0
10
20
30
40
50
60
70
80
90
Mar 2008 Mar 2009 Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015 Mar 2016
Macro Forces Weigh on U.S. Market
State of the Markets 8
Nasdaq Composite Index: January 2011 – March 2016
After years of impressive growth, bull market decelerates amid global macroeconomic headwinds
Since January 2014
U.S. Dollar Hits 10-Year Highs
Oil Price Hits 10-Year Lows
China Yuan & Market Shocks
Source: S&P Capital IQ
Nasd
aq
0
1,000
2,000
3,000
4,000
5,000
6,000
2011 2012 2013 2014 2015 2016
Year 2000 Peak
New Capital Sources Chase Venture Returns
State of the Markets 9
Venture capital deployments reached their highest level since 2000, driven by increased nontraditional crossover investor appetite from mutual and hedge funds
U.S. Venture Capital Deployed vs. Fundraised by Year: 2000 – 2015
$0
$10
$20
$30
$40
$50
$60
$70
$80
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
VC Fundraising VC Investments CVC Investments Crossover Investments
$105
Source: 2016 NVCA Yearbook, SVB Analytics estimates
Summary: Macro Environment
State of the Markets 10
Capital is inexpensive…
…public markets and private investments soared…
…thanks to relative stability.
State of the Markets 11
Valuations
Private Valuations Continued Growing in 2015
State of the Markets 12
Median Pre-Money Valuations Series Seed through Series B: 2011 – 2015
Median pre-money valuations have roughly doubled over the past five years across most investment stages
Median Pre-Money Valuations Series C through Series D+: 2011 – 2015
This value increase in the later stages is fueled by (and requires) rounds larger than those typically provided by VCs
$4 $4 $5 $5 $6
$7 $8 $9 $12
$14
$21 $21
$26
$33
$41
$0M
$5M
$10M
$15M
$20M
$25M
$30M
$35M
$40M
$45M
2011 2012 2013 2014 2015Seed Series A Series B
$50 $50 $56 $60
$74
$84 $92
$99
$135
$180
$0M
$20M
$40M
$60M
$80M
$100M
$120M
$140M
$160M
$180M
$200M
2011 2012 2013 2014 2015Series C Series D+
Source: Pitchbook
Tech Companies Stay Private Longer
State of the Markets 13
Years from founding to IPO (median): 1999 – 2015
The median age of tech companies at IPO has increased following stricter regulatory requirements post – 2000 dotcom bubble and 2008 financial crisis
With greater access to capital from
traditional and nontraditional
sources and rising valuations, tech
companies are choosing to delay
the scrutiny and transparency of
public markets. 0
2
4
6
8
10
12
14
16
1999 2001 2003 2005 2007 2009 2011 2013 2015
Median tech company age at IPO
Source: Dr. Jay Ritter, University of Florida
3 4
7
2
7
3 3
6
13 11
13 12
15
25 27
12 13
8
4
12 11
10
1
7
3
9
1
7
0
5
10
15
20
25
30
Private IPOs IPOs
2015: Year of the Private IPO
State of the Markets 14
Late-stage companies are opting to raise private capital rather than IPO; 2015 saw four times as many private IPOs (rounds >$100M) as IPOs
Source: CB Insights, S&P Capital IQ
IPO and PIPO Transactions for U.S. Technology Firms: Q1 2012 – Q1 2016
0
Who Are the Crossovers Funding Private IPOs?
State of the Markets 15
As companies delay public offerings, some of the largest fund managers have taken a primary role in funding late-stage rounds
Source: CBInsights
Global Investments in Venture Rounds – Crossover Investors
Tota
l Rou
nds
$35M $46M
$139M
$153M
$110M
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
0
10
20
30
40
50
60
2012 2013 2014 2015 2016
Tiger Global Management Goldman Sachs Wellington Management
Fidelity Investments Coatue Management T. Rowe Price
Blackrock Average Round Size ($MM)
Q1
Average Round Size ($M)
Average Round Size ($M)
The Advent of the Unicorn
State of the Markets 16
The number of private companies with $1B+ valuations has tripled since 2014, with nearly half of all unicorn value concentrated in the top 12 “decacorns”
Source: Wall Street Journal
Private Companies with Reported $1B+ Valuations: Q1 2014 – Q1 2016
Unicorn Market Value Concentration: March 2016
0
20
40
60
80
100
120
140
160
Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16
$1 - 2B $2-5B $5-10B $10-15B $15-20B $20B+
Uber $51B
Xiaomi $46B Airbnb $26B
Palantir $20B
Meituan-Dianping
$18B Snapchat $16B
WeWork $16B
Didi Kuaidi $16B Flipkart
$15B SpaceX $12B
Pinterest $11B
Dropbox $10B
All Other $278B
New Unicorn Entrants Eclipse Exits
State of the Markets 17
Net Change in Unicorns by Year: 2014 – Q1 2016
The pace of new companies reaching $1B+ valuations far exceeds the pace of exits, creating a backlog of private companies with a combined market value of more than $500B
Total Market Values
Apple $615B
Note: Exits include IPOs, M&A and revaluations below $1B. Source: Wall Street Journal; Google Finance 3/31/16
Year End Unicorns
2013
Exits New Year End Unicorns
2015
Year End Unicorns
2014
Exits New Exits New March End Unicorns
2016
45 -15
+49 79 -11
+76 144 -2
+4 146
0
20
40
60
80
100
120
140
160
All Unicorns $535B
Google $521B Facebook $321B
Unicorn IPOs $115B
State of the Markets 18
Exits
-500%
-400%
-300%
-200%
-100%
0%
100%
200%
300%
400%
500%
Private Investors Reap Unicorn Rewards
State of the Markets 19
Nearly two-thirds of unicorn exits yielded positive returns relative to the final private valuation for late-stage investors
Source: Wall Street Journal; S&P Capital IQ
Unicorn Returns at M&A or at IPO Date Close
IPO M&A
Last Private Exit Q1 2016
0%
-20%
-40%
-60%
-80%
-100%
<1x IC Recovered
Unicorn Values Fall Precipitously after IPO
State of the Markets 20
The vast majority of unicorns have plummeted since entering the public market
Source: S&P Capital IQ
Publicly Traded Unicorn Returns
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
~70% of Unicorns now trade below their IPO closing price
Median Return: -37%
Last Private Exit Q1 2016
0%
-20%
-40%
-60%
-80%
Public Values Point to Unicorn Mispricing
State of the Markets 21 Source: Wall Street Journal, S&P Capital IQ
Total Returns Compared to Unicorns’ Last Private Round
At the end of Q1 2016, the majority of publicly traded unicorns traded below their final private valuation, indicating a shift in focus towards profitability
-400%
-300%
-200%
-100%
0%
100%
200%
300%
400%
500%
Last Private Exit Q1 2016
0%
-20%
-40%
-60%
-80%
Size Limits Exit Options
State of the Markets 22 Source: CBInsights, Wall Street Journal
With a limited number of buyers for $1B+ companies, an IPO may be the only choice for those seeking an exit
All Tech Exits Unicorn Exits
57% IPO
2% IPO 8 16
4
2014 – 2015 2014 – Q1 2016
IPO M&A
IPO Window Is Uncertain in 2016
State of the Markets 23 Source: S&P Capital IQ
U.S. Tech IPOs vs. Nasdaq Performance
During market downturns, the IPO window narrows
U.S. Tech IPOs Nasdaq
IPO
s on
U.S
. Exc
hang
es
0
10
20
30
40
50
60
70
80Nasdaq
202 164
Growth-Stage Mega-Rounds Are Slowing
State of the Markets 24
With public markets less receptive to companies with large private valuations and unproven business models, private markets are scaling back private IPOs
Source: CB Insights, S&P Capital IQ
$0.5 $0.5 $1.2 $0.3 $1.6
$0.4 $0.6 $1.0
$3.4 $3.1 $2.9 $3.7 $3.7
$6.1 $7.0
$2.4 $3.0 3 4
7
2
7
3 3
6
13 11
13 12
15
25 25
12 13
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
$7.0
$8.0
0
5
10
15
20
25
30
Proceeds ($B USD) Private IPOs
Total Proceeds ($B USD)
Private IPO Transactions for U.S. Technology Firms: Q1 2012 – Q1 2016
Summary: Valuations and Exits
State of the Markets 25
Private valuations soared… …with a flood of crossover capital…
…but IPOs have underperformed… …and even that window is closing.
State of the Markets 26
Key Takeaways
Exit Conditions Remain Uncertain
State of the Markets 27 Source: S&P Capital IQ; Yahoo! Finance
Tech IPO Count: H1 2012 – H2 2015
Companies look for a sustained period of low volatility before going public
0
5
10
15
20
25
30
35
40
45
Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16
H1 2012 H2 2012 H1 2013 H1 2013 H1 2014 H2 2014 H1 2015 H2 2015 Q1 2016
^VIX: Q2 2012 – Q1 2016
20
15
10
5
0
$0.0
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0
$70.0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
VC Fundraising VC Investments
VCs Are Flush with Cash
State of the Markets 28
Cheap capital and crossover investors have left VCs with sizeable war chests
Source: 2016 NVCA Yearbook, SVB Analytics estimates
U.S. Venture Capital Deployed vs. Fundraised by Year: 2002 – 2015
$ Bi
llion
s
0
50
100
150
200
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
U.S. Venture Funding – Capital Reserve Index (Indexed to 2002)
Private Valuations Reveal Divergence
State of the Markets 29
Amid the recent public market pullback, investors are focusing on the most promising companies, curtailing new early-stage bets while doubling down on late-stage rounds
Source: Pitchbook
Median Pre-Money Valuations Series Seed through Series B: 2011 – Q1 2016
Median Pre-Money Valuations Series C through Series D+: 2011 – Q1 2016
$4 $4 $5 $5 $6 $6
$7 $8 $9 $12
$14 $16
$21 $21
$26
$33
$41
$37
$0M
$5M
$10M
$15M
$20M
$25M
$30M
$35M
$40M
$45M
2011 2012 2013 2014 2015 Q1 2016
Seed Series A Series B
$50 $50 $56 $60
$74
$100 $84 $92 $99
$135
$180
$261
$0M
$50M
$100M
$150M
$200M
$250M
$300M
2011 2012 2013 2014 2015 Q1 2016
Series C Series D+
Investor Sentiment Shapes IPO Market
State of the Markets 30
During bull markets, tech companies focus on growth at the expense of profitability at IPO, but as investor sentiment shifts away from growth, IPO candidates need to show strong unit economics and a clear path to profitability
Source: Dr. Jay Ritter, University of Florida
Percentage of Companies Profitable at IPO: 1995 – 2015
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Tech IPOs Non-Tech IPOs
?
Early Trends in 2016
State of the Markets 31 Source: SVB Analytics, S&P Capital IQ, Wall Street Journal, Mattermark
Revenue Multiple Compression
Cost Cutting & Layoffs
Alternative Investment Structures
The public markets are no longer valuing growth at all costs. Instead, investors are favoring proven business models, which is driving recent multiple compression.
Now that a path to profitability is as important as growth, companies must carefully manage cash burn to withstand adverse market conditions.
Given the uncertain exit horizon, alternative investment structures with stronger protective covenants will likely replace equity mega-rounds.
State of the Markets 32
Appendix
Report Authors
33
Steven Pipp Associate, SVB Analytics spipp@svb.com
Steve Allan, CFA Head of SVB Analytics sallan@svb.com
Sean Lawson Manager, SVB Analytics selawson@svb.com
John Ortelle Manager, SVB Analytics jortelle@svb.com
Steven Kakowski Associate, SVB Analytics skakowski@svb.com
State of the Markets
Special Thanks Vincent Timoney Director Silicon Valley Bank Rob Tompkins Managing Director Silicon Valley Bank Dan Zaelit Director Silicon Valley Bank Natalie Dillon Associate Silicon Valley Bank Daren Motsuoka Associate Silicon Valley Bank
About Silicon Valley Bank For more than 30 years, Silicon Valley Bank has helped innovative companies and their investors move bold ideas forward, fast. SVB provides targeted financial services and expertise through its offices in innovation centers around the world. With commercial, international and private banking services, SVB helps address the unique needs of innovators.
State of the Markets 34
This material, including without limitation to the statistical information herein, is provided for informational purposes only. The material is based in part on information from third-party sources that we believe to be reliable, but which have not been independently verified by us and for this reason we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. SVB Analytics is a member of SVB Financial Group and a non-bank affiliate of Silicon Valley Bank. Products and services offered by SVB Analytics are not FDIC insured and are not deposits or other obligations of Silicon Valley Bank. SVB Analytics does not provide investment, tax, or legal advice. Please consult your investment, tax, or legal advisors for such guidance. ©2016 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve System. SVB>, SVB Financial Group, and Silicon Valley Bank are registered trademarks. (0416-077)
About SVB Analytics SVB Analytics, a non-bank affiliate of Silicon Valley Bank, serves the strategic business needs of entrepreneurs, corporates and investors in the global innovation economy. For more than a decade, SVB Analytics has helped global business leaders make informed decisions by providing market intelligence, research, and consulting services. Powered by proprietary data, SVB Analytics has a unique view into the technology and life science sectors.
Recommended