Venture Industry Analysis

Overview and Takeaways:

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Overall decline in venture capital activity from 2016 to 2015, but median valuations are continuing to rise. These median valuations are increasing at early stages, reached a new high (past $100 million median) for Series C, started plateauing at Series B, but are declining for the first time since 2009 in later stages past Series C. It is also important to note that 2016 was the lowest year of IPOs since 2009, but the market has started strong in 2017.

End of 2015 and in beginning of 2016 public market comparables to private companies were doing bad so people thought there might have been a valuation bubble. Additionally, some mutual funds were marking down there private company investments which scared people about the valuations. Before 2016 began there had never been so many private companies valued at $1 billion and so much unrealized value in the VC market.

So in 2016 people took a step back and slowed down in terms of investing at crazy high valuations. In 2015 there were 60 unicorn deals and that number declined to 37 in 2016. The highest number of companies in the last decade exited at values lower then there most recent private valuation at 37 companies.

VC deals with corporate VC participation have been completed at high valuations than those without. The reason for this is that they don’t necessarily need a financial timely return, but get ancillary benefits from investing in the company such as technology and insight into if it makes sense as an acquisition. Corporate VCs are also at the height of how many investments they make in terms of quantity and dollar value.

Participating liquidation preferences have declined to the lowest levels in the past decade. These are more founder-friendly terms because the VCs do not get a 1.5x or 2x return in the even of an exit, but they receive 1x their money and there equity holding.

Looking at exits we are still continuing a downward trend started after the peak of 1,050 exits at a value of $80 billion in 2014. The following year 2015 provided 970 exits at a value of $48 billion and 2016 gave us 800 exits at a value of $53 billion. Having said all of that – 2017 is shaping up to reverse that trend with Snapchats $3 billion raise at a nearly $20 billion valuation and AppDynamics acquisition by Cisco for $3.7 billion. 15 companies in total have either filed for or completed their initial public offering in 2017 so far with MuleSoft raising $220 million at a $2 billion valuation and Okta raising $150 million at a $1.2 billion valuation.

Reasons for this increased activity include the S&P at all time highs, oil prices coming back, and the US dollars strength. Exits are also moving toward IPOs rather then M&A brecause private valuations have made companies so expensive that the pool of buyers is becoming very short.


Deep Dive my Three Industries:

Esports: No complete 2016 data, but assumed similar to 2015

2015 = 45 companies backed with $320M

Asset Management: No complete 2016 data

2015 = 265 companies backed with $3.2B

Government Technology: 2016 = 41 companies with $336M

2015 = 44 companies backed with $330M

ESports and Government Technology are currently in very similar situations in terms of deal quantity and value, however, looking back five years shows a different story. Government technology has had a relatively linear history of capital invested and number of deals closed over the last five years. This is in contrast to ESports which has had a spotty history of very few investments and capital raised until 2015. I believe the reason for this is Amazon’s 2014 acquisition of Twitch which put Esports on the map.

Asset Management is an entirely different league with spotty amounts of capital invested over the last five years, but a steady increase in the amount of companies backed. The volume and dollar amount is also in an entirely different league with around 200 companies being backed in Asset Management compared with approximately 45 for its peers.

One thing that all of these industries share is that they have all been increasing in terms of quantity of deals and dollars invested, which also mirrors the industry as a whole represented on the chart at the top of the page.

I still believe that all of these industries have strong opportunity for growth and have not reached their full potential. Esports represents a brand new untapped market with tons of different opportunities and a long lasting future ahead of it. Asset Management has internal inefficency, a fragmenting of its business and a high cost that is not justified by the service. Government Technology is fragmented, large, slow, expensive, necessary and has a catalyst for change in Trump’s recent executive order.

Including everything each industry has going for itself I also believe that all of these industries and select innovations within them will be around for the next 15 years and will not immediately be disrupted and turned on their head. Asset management and Government technology share the qualities of high cost and bad customer service, while Esports will likely avoid this misstep because it is an emerging industry. Lastly and most importantly all of these industries have the potential to be completely disrupted by startups right now and there is the opportunity of new market leaders.

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