state of the markets - silicon valley bank · pdf filestate of the markets inside views on the...

State of the MarketsInside views on the health and productivity of the innovation economyFOURTH QUARTER 2017

State of the Markets: Fourth Quarter 2017

4 Grading Our 2017 Predictions

5 An Era of Easy Money: Tech Valuations Soar

8 Delayed Debuts: Where Have All the IPOs Gone?

13 VC Disrupted: Emerging Sources of Capital

18 Risk On: Capital Chases ICOs

22 Tech and Society: In the Crosshairs

State of the Markets 2

State of the Markets: Fourth Quarter 2017Grading our 2017 predictions, with some fascinating new lessonsAs 2017 comes to a close, we looked back at our market predictions from the first quarter. It turns out that our crystal ball works like most: we were relatively close on our estimations of fundraising and valuations. But less so on our projections for IPOs and M&A activity, underscoring how dynamic the private capital environment remains.

Consider some of the surprises: not many people predicted the long and strong bull run in technology, especially in the face of elevated political tension and monetary tightening. Equities shrugged off those concerns and volatility hovered near historic lows for much of the year. Instead of resulting in robust IPO activity for tech’s best and brightest, we saw private capital and nontraditional players rush in offering new sources of funding —from SoftBank’s landscape-shifting Vision Fund, to emerging first-time venture firms, to a summer filled with ICOs. Do these trends mark a new era, or are they momentary blips in venture norms?

We hope the data and insights in this report provide valuable context on the capital markets as you make decisions for your own enterprise.

Bob BleeHead of Corporate FinanceSilicon Valley Bank


Grading Our 2017 Predictions


If 2017 taught us anything it was that the innovation economy remains resilient. Private valuations remain lofty. Venture capital commitments have been robust. And ample access to capital is delaying the need to go public for the brightest startups. But can emerging solutions to liquidity fully placate investors’ need to realize paper gains?

2017 Prediction* Grade 2017 Reality.With plenty of capital in VC war chests, valuations

remain stable across early stages but fall in later . stages without crossover participation.

Valuations Valuations plateaued for early and late stages. The gap between the best and the rest expanded as the market for venture capital bifurcates.

With public company valuation confidence restored and a stable of maturing unicorns, 2017

. sees 2–3x the number of IPOs as 2016.

IPOs 2017 IPOs will only marginally surpass 2016 despite favorable market conditions. Firms appear to prefer readily accessible private capital.

The spending spree from tech giants reaches the venture ecosystem but with mixed success

. compared to the most recent private valuation.

M&A Tech giants have been relatively quiet on the acquisition front this year. Others (e.g., automotive, private equity) have picked up the slack.

With full coffers, fundraising in 2017 falls from the . 2016 high, but interest from LPs stays high.

Fundraising Venture fundraising will likely fall relative to 2016 but should exceed $30B for a fourth straight year.

With rates rising, asset managers look for growth elsewhere. This helps deflate the overheated

. market for late-stage capital.

Crossovers Crossover participation has remained below levels seen in 2014–2015. However, private equity has emerged as a source of late-stage capital.

*Predictions published by SVB in January 2017.


An Era of Easy Money: Tech Valuations Soar

Five Tech Giants Have Led Bull Run for Equities


U.S. tech giants have generated outsized returns during the near decade-long economic expansion, even relative to other equities. Now, their collective market value exceeds that of the next 10 largest U.S. stalwarts combined.

Sources: S&P Capital IQ and SVB analysis.

Cumulative Value-Weighted Returns: 1/1/13–9/30/17

-50%

0%

50%

100%

150%

200%

2013 2014 2015 2016 2017

Market Cap: Five Tech Giants vs. Next 10: 9/30/17

$3.00T $2.97TApple, Amazon, Alphabet, Facebook & Microsoft

S&P 500

$0.0T

$0.5T

$1.0T

$1.5T

$2.0T

$2.5T

$3.0T

$3.5T

$4.0T

$4.5T

2009 2011 2013 2015 2017 2019 2021

Continued Calm in the Face of Fed Action


Amid volatility at historic lows, the Fed has outlined its plan to unwind its balance sheet after years of easy money. This, along with rising rates, could slow the abundance of capital flowing into venture from nontraditional sources.

Sources: S&P Capital IQ, Federal Reserve Bank of New York and SVB analysis.

Federal Reserve Balance Sheet (Projected): 2009–2021S&P 500 Volatility (^VIX): 10/1/16–9/30/17

0

10

20

30

40

50

60

70

80

Oct. 1,2016

Jan. 1, 2017

April 1, 2017

July 1, 2017

2011 2013 2015 2017 2019 2021

Black Monday (2011)

Peak During Financial Crisis (2008)

Flash Crash (2015)

Peak During Dot-com Crash (2001)

Historical Projected

Without Reinvestment

Fed Plan

MBSTreasuries


Delayed Debuts: Where Have All the IPOs Gone?

$0B

$2B

$4B

$6B

$8B

$10B

$12B

$14B

$16B

$18B

U.S. Tech Tops $10B with Resurgent Mega-Rounds


For a second straight quarter, U.S. tech companies attracted private capital from investors in amounts once reserved for the public markets. Beneath this second wave of $100M+ rounds, the underlying venture economy continues at a healthy clip across all stages of capital need.

Sources: PitchBook and SVB analysis.

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2012 2013 2014 2015 2016 2017

Split by Round Size:$1B+ $25–49M $100–999M $10–24M$50–99M $0–9M

$100M+ Rounds

Venture Capital Invested in U.S. Information Technology: Q4’12–Q3’17

5

10

15

20

25

3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q

Private Capital Health Belies Public Exit Lethargy


The summer months were not quiet for late-stage venture fundraising in 2017: Nearly 40 companies completed deals for $100M+ in financing between Q2 and Q3. Unfortunately, this renewed interest is not the result of a revitalized environment for public offerings — the only viable option for returns at such a massive scale.

Sources: PitchBook, S&P Capital IQ and SVB analysis.


2012 2013 2014 2015 2016 2017

Number of U.S. Tech IPOs vs. PIPOs ($100M+ Private Rounds): Q4’12–Q3’17

U.S. Tech IPOsU.S. Tech PIPOs

IPOs Trail Private Raises

Uber$68B

Airbnb$29B

SpaceX$21B

Palantir$20B

WeWork$20B

Extended Runways Add to Unicorn Backlog


Free-flowing capital at the late stage has created new unicorns and extended runways for the existing class, even as billion-dollar exits remain rare, adding to the accumulating value of privately held companies. The seven U.S. tech unicorns valued at or above $10B, though just 7% of the group, account for 53% of the value.

Sources: PitchBook, S&P Capital IQ, The Wall Street Journal and SVB analysis.

Ratio of New Unicorns vs. Unicorn Exits: 1H’14–Q3’17

0x

1x

2x

3x

4x

5x

6x

7x

8x

9x

2H'171H'172H'161H'162H'151H'152H'141H'14

88 Companies Valued <$10B:

$161B

U.S. Tech Unicorns (Most Recent Valuation): 9/30/17

Pinterest: $12BDropbox: $10BQ3’17


Two primary benefits of an IPO are access to public markets and shareholder liquidity. But of the 30 largest U.S. tech unicorns, half have raised private capital within the last six months, likely extending their runways beyond the age of their predecessors’ public debuts. As a result, many have sought alternative sources of partial liquidity.

For illustrative purposes only as axes serve as relative approximations for pressures. IPOs include listings by unicorns since 2015.U.S. tech unicorns with valuations $2B+ (the top 30) are included in visualization. Logos indicate valuations $4B+.Sources: S&P Capital IQ, PitchBook, CB Insights, The Wall Street Journal, Crunchbase and SVB analysis.

U.S. Tech Unicorns: Time Since Founding and Last Financing (Sized by Value at IPO or Private Value as of 9/30/17)

Highfliers Access Private Capital, Delaying IPOs

0 3 6 9 12 15 18 21 24 27 30+

IPOsUnicorns

Years from Founding

Months Since Last Financing10-Month Difference

Medians

Pressure to Go Public for Capital

Pres

sure

to G

o Pu

blic

for L

iqui

dity 0

2

4

6

10

12+


VC Disrupted: Emerging Sources of Capital

$0B

$2B

$4B

$6B

$8B

$10B

Ways and Means of SoftBank’s Vision Fund


At $93B, the size of SoftBank’s Vision Fund far surpasses that of any private equity or venture capital fund to date. Adding to the dry powder flooding private capital markets, deals from the Vision Fund have skewed toward secondary transactions, providing liquidity to employees and early investors and relieving pressure to go public.

Sources: PitchBook and SVB analysis.

SoftBank Vision Fund: Limited Partners and Fund Size Comparisons Total Deal Value of Disclosed Vision Fund Investments: 2017

SoftBank Vision Fund

$93BPrimary +

Secondary $6.9B

Primary$3.6B

Largest PE$23B

Largest VC$3.3B

SoftBank$28B

Saudi ArabiaPublic Investment Fund

$45B

Mubadala$15B

Others$5B

Apollo Global Management

NEA

35

5560

75

89

107 106

0%

4%

8%

12%

16%

20%

0

25

50

75

100

125

1 2 3 4 5 6 7

Corporate Venture Participation Climbs On

15

More than 100 corporate venture capital (CVC) arms invested for the first time in H1’17 — 65% higher than H2’16 —with many coming from either non-digital native or international firms. Fueled by this expanding interest, CVC participation rates have climbed from approximately 1 in 10 venture deals to nearly 1 in 6 in the past five years.

Logos denote notable launches of CVC groups and/or first investment by year.Sources: CB Insights and PitchBook.

Number of New CVC Groups: 2011–1H’17 Deals with CVC Participation: 2011–1H’17

2011 2012 2013 2014 2015 2016 1H’17

State of the Markets

Family Offices Help Drive First-Time Funds

16

Family offices are playing a growing role in venture capital, from supporting first-time firms to direct investments. But not all family offices are created equal: ICONIQ Capital — serving industry heavyweights like Mark Zuckerberg, Sheryl Sandberg and Jack Dorsey — has participated in 19 venture rounds greater than $100M since 2012.

*Through 9/30/17.Sources: Global Family Office Report 2017, UBS & Campden Research, CB Insights, PitchBook and SVB analysis.

Global Family Office Allocation: 2017 First-Time U.S. Venture Fundraising: 2009–Q3’17

Alternative Investments

PE Funds7.1%

Other8.5%

Direct VC/PE & Co-Investing

13.2%

0

10

20

30

40

50

60

$0.0B

$0.5B

$1.0B

$1.5B

$2.0B

$2.5B

$3.0B

2009 2011 2013 2015 2017*

Capital RaisedFunds ClosedFull-Year Run Rate

35%

16%

27%

15%

7%

RealEstate

Equities

Bonds

Cash or Equiv.

Hedge Funds6.2%

State of the Markets

Public Markets

Traditional Venture Capital

Crowded Field of Investors in Innovation


All these nontraditional sources of capital are competing alongside traditional venture firms – a boon to startups and their valuations. However, it remains to be seen if these new participants are in it for the long haul and, consequently, materially changing the landscape.

Source: SVB analysis.

ICOs

Emerging Sources of Venture Capital

Inve

stm

ent S

ize

Early Late Liquidity

Private EquityCorporates

Micro VCsFamily Offices

Vision FundCrossovers


Risk On: Capital Chases ICOs

Ethereum Gains Supporters Large and Small


Exuberance continues around blockchain technologies, including, but no longer limited to, Bitcoin. The flexibility of Ethereum’s platform has attracted wide-ranging support, from startups looking to raise their first capital (see next slide) up to enterprises hoping to maintain an edge over the next generation of disruptors.

Sources: CoinDesk, organization websites and SVB analysis.

Relative Weekly Trading Volume: 1/1/17–9/30/17

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1/1/2017 2/1/2017 3/1/2017 4/1/2017 5/1/2017 6/1/2017 7/1/2017 8/1/2017 9/1/2017Jan. 1, 2017

April 1, 2017

July 1, 2017

Notable Organizations Exploring Ethereum Use Cases

Enterprise Ethereum Alliance: Board Members

Hyperledger: Premier Members

The Summer of ICOs: $2B Later


Venture firms at the forefront have long invested in teams developing blockchain applications. However, starting in the summer of 2017, initial coin offerings rapidly displaced traditional equity as the preferred method of fundraising. From Q2’17–Q3’17, nearly 90% of the staggering $2.3B raised in the space came through ICOs.

*Venture deals dating back to 2012 and ICOs dating back to 2014 based on available data.Sources: CoinDesk and SVB analysis.

Blockchain Company and Project Cumulative Funding:* 2015–Q3’17

$0.0B

$0.5B

$1.0B

$1.5B

$2.0B

$2.5B

$3.0B

$3.5B

$4.0B

$4.5B

1/1/2015 4/1/2015 7/1/2015 10/1/2015 1/1/2016 4/1/2016 7/1/2016 10/1/2016 1/1/2017 4/1/2017 7/1/2017

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2015 2016 2017

ICOs

Venture

Blockchain Funding: 2012–Q3’17

Venture ICOs

2012 $2M . $0M .

2013 $95M . $0M .

2014 $362M . $0M .

2015 $491M . $9M .

2016 $601M . $256M .

Q1’17 $108M . $38M .

Q2’17 $235M . $785M .

Q3’17 $6M . $1,260M .

Total $1.9B. $2.3B.

$100M

$153M $159M

$200M

$232M$262M

$413M

$0M

$50M

$100M

$150M

$200M

$250M

$300M

$350M

$400M

$450M

Series A ICO Series B Series C ICO ICO Series D

A Swiss Army Knife for Funding Blockchain Tech


While the majority of ICOs have the risk profile and capital requirements of an early stage startup, top projects have attracted funding in line with the largest financing events for late-stage venture. As companies turn to ICOs, questions remain, such as potential regulatory constraints and balancing the needs of equity and token holders.

Includes deals greater than $100K.Sources: CoinDesk, PitchBook and SVB analysis.

U.S. Tech Venture Capital vs. ICOs (Median Capital Raised): 1/1/17–9/30/17

U.S. Tech Venture Capital (Largest Rounds Raised)vs. Notable ICOs: 1/1/17–9/30/17

$1.9M

$4.7M$6.0M

$14.0M

$25.0M

$35.0M

$0M

$5M

$10M

$15M

$20M

$25M

$30M

$35M

$40M

Seed ICO Series A Series B Series C Series D

n=796 n=151 n=741 n=366 n=187 n=71 CloudMindsSeries A

Filecoin InstacartSeries D

Bancor NautoSeries B

TezosRedditSeries C

Seed ICOs Series A Series B Series C Series D


Tech and Society: In the Crosshairs

“Move Fast and Break Things” Meets Pushback


As technology reaches global scale and permeates daily life, its effect on society is magnified. Government agencies and regulators in the United States and abroad have taken notice and action against some of the largest innovators.

Sources: The Economist, Reuters, CNN, The New York Times and The Wall Street Journal.

United States European Union China

The world’s most valuable resource is no longer oil, but data

EU slaps Google with record $2.7 billion fine

Beijing Pushes for a Direct Hand in China’s Big Tech Firms

The Thin Line Between Innovation and Irritation

U.S. lawmakers want crackdown on Facebook, Twitter political ads

U.S. and Europe May Collide on Taxing Apple and Amazon

Tech Is Making Its Voice Heard in D.C.


Amid greater scrutiny, U.S. technology giants are increasingly exerting influence in Washington. Aggregate lobbying spend by the five tech behemoths is greater than ever, on pace to surpass $50M for the first time this year.

Source: PitchBook.

Lobbying Spend by U.S. Tech Corporates: Q3’12–Q2’17

$0M

$5M

$10M

$15M

Q2'17Q1'17Q4'16Q3'16Q2'16Q1'16Q4'15Q3'15Q2'15Q1'15Q4'14Q3'14Q2'14Q1'14Q4'13Q3'13Q2'13Q1'13Q4'12Q3'12

AppleGoogle MicrosoftFacebookAmazon


2012 2013 2014 2015 2016 2017


Appendix

Report Authors


Steven PippSenior Research [email protected]

Bob BleeHead of Corporate [email protected]

Sean LawsonSenior [email protected]

Bob Blee heads SVB’s Corporate Finance Group, which provides commercial banking, lending and guidance to late stage corporate technology clients.

Sean Lawson is a Senior Manager with SVB, responsible for leading research and insights spanning early and growth stage venture-backed technology companies. Sean received his Bachelor’s degree in management science from the University of California, San Diego.

Steven Pipp is a Senior Research Associate, responsible for market research and analysis of the venture-backed technology space. Steven holds a MSF from the Carroll School of Management at Boston College and a BSB from the Carlson School of Management at the University of Minnesota. He passed Level III of the CFA Program in 2017.

About Silicon Valley BankFor 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. Withcommercial, international and private banking services, SVB helps address the unique needs of innovators.

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.Silicon Valley Bank is registered in England and Wales at Alphabeta, 14-18 Finsbury Square, London EC2A 1BR, UK under No. FC029579. Silicon Valley Bank is authorised and regulated by the California Department of Business Oversight and the United States Federal Reserve Bank; authorised by the Prudential Regulation Authority with number 577295; and subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. Silicon Valley Bank is a subsidiary of SVB Financial Group, a Delaware corporation and is an affiliate of SVB Financial Group UK Limited. SVB Financial Group UK Ltd is registered in England and Wales at Alphabeta, 14-18 Finsbury Square, London EC2A 1BR, UK under No. 5572575 and is authorised and regulated by the Financial Conduct Authority, with reference number 446159. SVB Financial Group and its subsidiary Silicon Valley Bank are members of the Federal Reserve System and Silicon Valley Bank is a member of the FDIC.©2017 SVB Financial Group. All rights reserved. SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license. Silicon Valley Bank is a member of the FDIC and the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB). CompID-1015

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