State of the Markets Inside views on the health and productivity of the innovation economy
Second Quarter 2018 State of the Markets: Second Quarter 2018
4 Macro Snapshot: Long-Lived Bull Market
7 IPO Conditions: Value in the Face of Volatility
12 Late Stage: Another Round of Mega-Rounds
17 Global Perspective: Tension Over Tech
22 Special Report: Prepared for a Downturn?
State of the Markets 2 State of the Markets: Second Quarter 2018 The Good Times Roll, Even as Risks Rise
The bull market powers on, and money continues to flow into the innovation economy. At the same time, we are seeing a reemergence of volatility and a bevy of new risks — including tighter monetary policy and the specter of a trade war — but it’s still status quo for now in the capital markets.
Despite market turbulence, the first quarter of 2018 ushered in several high-profile IPOs, and consumer- and enterprise businesses are finding success as public entities. Furthermore, companies reluctant to go down the IPO route found alternative paths. After years of successful fundraising, the world remains awash in capital, and sovereign wealth funds appear poised for even greater contributions. All of these factors are expected to provide further tailwinds for the tech sector.
This remains an exciting time for tech around the globe, with some caveats. Innovation companies thrive on open markets, and rich valuations could be undermined by strained geopolitics, wavering consumer confidence and a releveling of investors’ portfolio mix as interest rates rise. While the good times roll, economic cycles don’t last forever, and the trends don’t always point upward. For the moment, however, it’s game on.
Bob Blee Head of Corporate Finance
State of the Markets 3 Long-Lived Bull Market
State of the Markets 4 The Second Longest Bull Market Powers On
Since the end of the global financial crisis, equities have been enjoying a nine-year bull run — the second longest since the Second World War. The longest streak was also tech-powered, but ended in the dot-com bust of 2000. Will things end differently this time?
Cumulative Return: Longest S&P 500 Market Runs Since 1945
450% 6/13/1949June 1949 – Aug. 1956 Dot-Com Bubble 10/3/1974Oct. 1974 – Nov. 1980 400% 8/12/1982Aug. 1982 – Aug. 1987 10/11/1990Oct. 1990 – Mar. 2000 350% 10/9/2002Oct. 2002 – Oct. 2007 3/9/2009Mar. 2009 – Active 300% Current 250%
200%
150%
100%
50%
0% 00 11 22 33 44 55 66 77 88 99 Duration of Bull Market (Years)
Sources: LPL Research, S&P Capital IQ and SVB analysis. State of the Markets 5 Signaling the End of Easy Money
Strong economic data suggests that the Federal Reserve will continue raising interest rates. This may allow money managers to capture more attractive yields in less-risky asset classes. Concurrently, its unwinding of $1T in assets will also reduce the availability of capital.
Fed Funds Effective Rate: 2010–2020 Fed Balance Sheet (Projected2): 2010–2021
5.0% $4.5T Actual MBS3 Midpoint of Forecasts1 Treasuries 4.5% $4.0T
4.0% Fed Plan $3.5T
3.5% $3.0T 3.0% $2.5T 2.5% $2.0T Without 2.0% Reinvestment $1.5T 1.5%
$1.0T 1.0%
0.5% $0.5T Historical Projected 0.0% $0.0T 2011 2013 2015 2017 2019 Long 2009 2011 2013 2015 2017 2019 2021 2009 20112011 20132013 20152015 20172017 20192019 20212021 Run
Notes: 1) & 2) Forecasts and projections provided by Federal Open Markets Committee of the Federal Reserve. 3) Mortgage-backed securities. Sources: S&P Capital IQ, Federal Reserve Bank of New York and SVB analysis. State of the Markets 6 Value in the Face of Volatility
State of the Markets 7 Spotify Lists, Undeterred by Market Turbulence
History confirms that tech companies prefer calm markets for IPOs. But even the recent surge in volatility couldn’t derail Spotify from its nontraditional direct listing. In fact, SPOT experienced milder swings relative to the early trading of SNAP.
Volatility (VIX)1 vs. U.S. Venture-Backed Tech IPOs: 2005–1H’182 Early Trading Values vs. Offer Price
80 +80% Snap
60 Spotify +70%
40 +60% 20 +50% 0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 ’18 +40% 25
+30% 20
15 +20%
10 +10% 5 Opening First Day Trade Close
IPO Price or Reference Value First Trade High Close 1-Week Later 0 1H'05 2H' 05 1H'06 2H' 06 1H'07 2H' 07 1H'08 2H' 08 1H'09 2H' 09 1H'10 2H' 10 1H'11 2H' 11 1H'12 2H' 12 1H'13 2H' 13 1H'14 2H' 14 1H'15 2H' 15 1H'16 2H' 16 1H'17 2H' 17 1H'18 +0% IPO Offer Price/ First Day One Week Reference Price High Later Notes: 1) Volatility presented is implied forward volatility of the S&P 500. 2) 1H’18 IPO count includes six completed IPOs as of 4/20/18 and three upcoming listings. Sources: S&P Capital IQ, PitchBook, Renaissance Capital and SVB analysis. State of the Markets 8 IPOs Don’t Happen Overnight
Two decacorn debuts captured Q1 headlines, but their decade-plus journeys illustrate different paths to their current robust valuations. Meanwhile, China’s Xiaomi also boasts a “stale” valuation from years ago, but that could double in its highly anticipated IPO later this year.
Valuation Progression from Founding to IPO (Relative to Final Private Round) Xiaomi $100B IPO 2.0x Late 2018 Spotify Dropbox Company Xiaomi Snap +117%1 2006 2007 Year Founded 2010 2010 Spotify $27B Listing 1.5x April 2018 +33% Dropbox $8B IPO Last March 2018 Private1.0x Valuation +20% Snap $20B IPO March 2017 0.5x -3%
0.0x 12 11 10 9 8 7 6 5 4 3 2 1 IPO +1 0.2 0.5 0.8 -1.2 -1.5 -2.2 -7.2 -3.2 -5.2 -2.5 -7.5 -1.8 -3.5 -5.5 -8.2 -2.8 -4.2 -7.8 -9.2 -6.2 -3.8 -8.5 -5.8 -4.5 -9.5 -6.5 -0.2 -8.8 -0.5 -4.8 -9.8 -6.8 -0.8 -11.2 -11.5 -11.8 -10.2 -10.5 Years Prior-10.8 to Public Offering
Note: 1) Xiaomi IPO value, $100B, based on high end of range as reported by The Wall Street Journal, March 5, 2018. Sources: The Wall Street Journal, S&P Capital IQ, PitchBook and SVB analysis. State of the Markets 9 Both Enterprise and Consumer Find Success
Struggling to prove their growth stories, the stocks of Snap and Blue Apron have sunk, dragging down public perception of consumer tech. However, the data shows solid early performances for both enterprise- and consumer-facing businesses can enjoy success relative to private valuations.
Market Cap Relative to Last Private Valuation: $1B+ U.S. Tech IPOs from March 2017–March 2018
5.0x Consumer $2.0B1 Enterprise 6.6x LPV2 $4.1B 4.1x LPV 4.0x $5.9B4 3.9x LPV $4.2B 3.6x LPV $3.3B $3.1B 3.0x 3.1x LPV 3.1x LPV
$1.9B $1.2B 2.0x 2.3x LPV 2.3x LPV
$12.3B $2.2B 1.2x LPV 1.4x LPV 1.0x $19.5B $3.0B 1.0x LPV 0.7x LPV $0.4B 0.0x 0.2x LPV 3 01/17IPO 02/171 03/172 04/173 05/174 06/175 07/176 08/177 09/178 10/179 11/1710 12/1711 01/1812 02/1813 Months Trading Since IPO
Notes: 1) Market Cap is as of March 31, 2018. 2) Market cap as of March 31, 2018 relative to the last private valuation available. 3) IPO offer price is the first data point for each company to capture the pop from its first day of trading. 4) MuleSoft announced its sale to Salesforce on March 20, 2018. Sources: S&P Capital IQ, PitchBook and SVB analysis. State of the Markets 10 Public Multiples Bode Well for Venture Deals
Valuations for forthcoming private SaaS venture deals continue to closely track their public company counterparts as consensus grows around key business metrics. Growth is still being rewarded: The much higher revenue growth rates for companies within the private transactions set (~60% vs. BVP1 median: ~30%) compensates for the typical illiquidity discount.
Enterprise Software Valuations: Revenue Run Rate Multiple2 10.0x
9.0x Median of Next 20 Private Forecast4 Enterprise Software Transactions3 8.0x
7.0x
6.0x
5.0x Median of BVP CloudIndex 4.0x Example: In mid-November 2015, the Public Companies median of the BVP Cloud Index was 6.6x. The next 20 transactions (as captured by 3.0x SVB data) had a median multiple of 7.6x.
2.0x 2015 2016 2017 Q1’18
Notes: 1) More infoformation on BVP Cloud Index at: https://www.bvp.com/strategy/cloud-computing/index. 2) Revenue run rate = Most Recent Quarter’s Revenue x 4. Valuations based on pre-money for private transactions and total enterprise value for public companies. 3) Data based on SVB’s observations of ~120 private market transaction multiples of venture-backed companies with $25M+ in run rate. 4) Forecast based on median premium for private transactions relative to public market multiples. Sources: Bessemer Venture Partners, S&P Capital IQ, SVB proprietary data and SVB analysis. State of the Markets 11 Another Round of Mega-Rounds
State of the Markets 12 Private Markets Dominate
Traditionally, companies seeking significant capital would accept the added transparency and scrutiny of the public markets. But starting in 2014, the demand and funding for PIPOs 1 has exploded. For the past four years, mega-rounds have outpaced IPOs every quarter.
Deal Count of U.S. Venture-Backed Tech IPOs vs. PIPOs: 2012–Q1’18
30 U.S. Tech IPOs U.S. Tech PIPOs
25
20
15
10
5
0 Q11 Q22 Q33 Q44 Q11 Q22 Q33 Q44 Q11 Q22 Q33 Q44 Q11 Q22 Q33 Q44 Q11 Q22 Q33 Q44 Q11 Q22 Q33 Q44 Q11 2012 2013 2014 2015 2016 2017 2018
Note: 1) “Private IPOs,” or “PIPOs” are $100M+ private venture rounds. Sources: PitchBook and SVB analysis. Q2 State of the Markets 13 SoftBank Vision Fund Emerges as Third Propellant
Mutual funds and hedge funds have scaled back their fervor since 2013–2015, and private equity seemingly awaits more favorable valuations. So what led to 21 PIPOs in Q1 — the third highest to date? SoftBank’s Vision Fund has emerged as a force and remains hungry for innovative tech assets.
Participation Rates from Nontraditional Venture Investor Classes in U.S. Tech PIPOs: 2012–Q1’18 39% 40% 80 SoftBank Vision Fund PIPO Deal Count Crossover Investors 35% 70 Private Equity/Family Offices 32%
30% 60
24% 25% 50
20% 40
15% 30
10% 20
5% 10
0% 0 2012 2013 2014 2015 2016 2017 Q1’2018 Notes: 1) Crossovers include BlackRock, Coatue Management, Fidelity Investments, Franklin Templeton Investments, T. Rowe Price, The Hartford Financial Services, Tiger Global Management and Wellington Management. 2) Private Equity/Family Offices include BlackRock Private Equity Partners, General Atlantic, ICONIQ Capital, Insight Venture Partners, Kohlberg Kravis Roberts, Silver Lake, TPG, Vulcan Capital and Warburg Pincus. Sources: PitchBook and SVB analysis. State of the Markets 14 Private Investment Outpaces VC Fundraising
Participation by these nontraditional investors, as well as corporate and international investors, has pushed investment in the innovation economy to precarious heights. Venture-backed companies raised 2.5x what their venture firm counterparts received in commitments in 2017.
U.S.$90B Venture Investment & Fundraising: 2008–2017 Venture Investment Dollars Relative to VC Fundraising
$80B 3.0x U.S. Venture Investment U.S. Venture Fundraising $70B 2.5x
$60B 2.0x $50B
$40B 1.5x
$30B 1.0x
$20B
0.5x $10B
$0B 0.0x 200 % 300 % 400% 500 % 600% 700 % 800% 900% 1000% 1100% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2011 2014 2017
Sources: PitchBook and SVB analysis. State of the Markets 15 Venture Prepares for Even More Mega-Rounds
Venture firms are adjusting to this cash-rich environment as well. The upper echelon of venture capitalists are stocking their war chests with significant capital to ensure continued participation, even as their portfolio companies raise multiple late-stage rounds.
The Three Largest Venture Funds Raised Annually as a Percentage Sequoia Capital: 2018 Fundraising1 of Total Fundraising in That Year 35% $14B
India 30% $12B
China 25% $10B United States 20% $8B
15% $6B
Global 10% $4B Growth
5% $2B
0% $0B 2013 2014 2015 2016 2017 20182 20181
Notes: 1) Based on reported anticipated values as of March 5, 2018. 2) Includes Sequoia Global Growth fund at anticipated $8B. Sources: PitchBook, The Wall Street Journal and SVB analysis. State of the Markets 16 Global Tension Over Tech
State of the Markets 17 Trade Wars Matter, Even for Tech
Technology companies thrive in open markets. Three of the five US tech giants recognize more revenue overseas than in the US. Both sides in the Salesforce.com acquisition of MuleSoft recognize approximately one-third of revenue abroad. Access to global markets is critical to maintain the valuations of innovation companies today.
Select U.S. Tech Company Revenue by Region: 2017
100% 63% 32% 53% 50% 56% 31% 39%
International 75% Revenue
50%
United States 25% Revenue
37% 68% 47% 50% 44% 69% 61% 0% AAPL AMZN GOOG MSFT FB CRM MULE
Sources: S&P Capital IQ and SVB analysis. State of the Markets 18 Hemispheres of Influence: Ridesharing Rivals
In 2014, with a newly minted $40B valuation, Uber looked set to conquer the world. Then China’s DiDi Chuxing established a network of global partners, contesting Uber’s access to key markets. Since, Uber has sold operations to local rivals in three markets, and the battle rages on elsewhere.
Uber and DiDi Chuxing: Valuations, Fundraising and Notable Global Competitions
$70B Eastern Europe Valuation
North America China $56B Uber combined operations with Yandex DiDi invested in Estonia’s Taxify Valuation
Middle East DiDi invested in Lyft’s Series E & F Uber sold its China operations to DiDi
Latin America Southeast Asia DiDi invested in UAE-based Careem
India $16B Uber sold its SE Asia operations to Grab $17B DiDi invested in, and then acquired, 99 DiDi invested in Grab’s Series E, F & G Raised Raised
DiDi invested in Ola’s Series F
Withdrew from Market Investment Acquisition Sale of Operations Partnership
Sources: PitchBook, TechCrunch, Reuters, Bloomberg, The Wall Street Journal and SVB analysis. State of the Markets 19 China Focuses Closer to Home
Investment from China to the United States had slowed well before CFIUS grabbed headlines again in Q1. Certainly this reflects structural changes, such as capital control enforcement, but it’s also a sign of attractive strategic investment opportunities closer to home.
U.S. Tech Venture Deals with Participation Baidu, Alibaba, Tencent and JD.com’s from a China-Based Investor Venture Deal Count by Region
15% 30 $100M+ Rounds United States Sub $100M Rounds Asia Ex-China 25
10% 20
15
5% 10
5
0% 0 2012 2013 2014 2015 2016 2017 Q1'18 2012 2013 2014 2015 2016 2017 Q1’2018
Sources: PitchBook and SVB analysis. State of the Markets 20 China Eyes Tech Self-Sufficiency
China has ambitions to become the global leader in several advanced technology areas, each requiring significant investment of capital. Through a combination of government support and domestic enthusiasm, commitments to venture funds topped $50B for the second year in a row.
U.S. Venture Fundraising: 2008–2017 Key Sectors Outlined in “Made in China 2025”
$60B China Venture Fundraising — Domestic 1) New advanced information technology China Venture Fundraising — Foreign 2) Automated machine tools & robotics $50B 3) Aerospace & aeronautical equipment
$40B 4) Maritime equipment & high-tech shipping 5) Modern rail transport equipment $30B 6) New-energy vehicles & equipment
$20B 7) Power equipment 8) Agricultural equipment $10B 9) New materials 10) Biopharma & advanced medical products $0B 2008 2009 2010 2011 2012 2013 20142014 2015 2016 2017 Likely to compete with US innovation companies
Sources: Zero2IPO’s PEdata, The State Council of the People’s Republic of China and SVB analysis. State of the Markets 21 Prepared for a Downturn?
State of the Markets 22 Dry Powder Tops $100B in China and the West
Years of strong fundraising have venture firms well-positioned to support their best portfolio companies. Capital available for investment in fervent China suddenly rivals that of the more established Western world, but would these enormous commitments hold up under stress?
U.S. & European Venture Dry Powder: 2008–2017 China Venture Dry Powder: 2008–2017
$125B $120B $125B $118B $111B
$95B $94B $100B $100B
$75B $75B
$53B $49B $50B $50B
$24B $25B $25B
$0B $0B 200820082009 2010 20112011 2012 2013 20142014 2015 201620172017 200820082009 2010 20112011 2012 2013 20142014 2015 201620172017
Sources: PitchBook, Zero2IPO’s PEdata and SVB analysis. State of the Markets 23 Sovereign Wealth Flows to Innovation
Saudi Arabia and the United Arab Emirates, representing a combined one-sixth of the world’s oil production, are investing in tech — directly and through the Vision Fund. Other oil-rich nations, like the Nordics, are similarly diversifying. Could sovereign wealth serve as a fourth wave of capital?
WTI Crude Oil Price: 2008–Q1’18 SoftBank Vision Fund Backers Select Direct Investments in Tech
$150 Others Mubadala $5B. SoftBank (UAE). $125 $28B $15B.
$100 $110M Series D $4.6B Venture February 2018 February 2018 SoftBank Co-Led Investment Co-Led w/SoftBank $75 Vision Fund $93B $50
$25
Saudi Arabia $5.6B Series G $963M Series D Public Investment Fund June 2016 March 2018 $0 Contributed $3.5B Co-Led w/Temasek 2008 2011 2014 2017 $45B 2011 2012 2017 2013 2015 2018 2014 2016 2010 2008 2009
Sources: S&P Capital IQ, U.S. Energy Information Administration, Financial Times, PitchBook and SVB analysis. State of the Markets 24 Cheaper Valuations Led to 2016 Acquisition Spree
When public multiples tumbled in early 2016, both financial and strategic buyers pounced. More than a dozen public-to-private acquisitions occurred before year-end, setting a floor for valuations and restoring investor confidence in the space that carried through 2017 and into 2018.
Run Rate Multiples for BVP Cloud Index and Strategic and Financial Public-to-Private Deals: 2015–Q1’18
12.0x BVP Cloud Index (Median) 14 SaaS Acquisitions in 9 Months MuleSoft Strategic Acquisitions 18.6x Financial Acquisitions 10.0x
8.0x
6.0x
4.0x
2.0x
0.0x 1/1/15 1/1/16 1/1/17 1/1/18 2015 2016 2017 Q1’18
Sources: PitchBook, TechCrunch, Bloomberg, The Wall Street Journal and SVB analysis. State of the Markets 25 Value is in the Eye of the Acquirer
The deals closed following the last (short-lived) downturn are indicative of acquirers’ preferences. Corporates were willing to pay up for higher growth and strategic value. Private equity preferred companies closer to profitability and relatively lower revenue multiples.
Select Metrics for U.S. Tech Public-to-Private Acquisition Targets (Middle 50%): April–December 20161 Revenue Growth2 EBITDA Margin3 Run Rate Multiple4 Transaction Value 45% 25% 9.0x $4.5B
40% 20% 8.0x $4.0B
35% 15% 7.0x $3.5B
30% 10% 6.0x $3.0B
25% 5% 5.0x $2.5B
20% 0% 4.0x $2.0B
15% -5% 3.0x $1.5B
10% -10% 2.0x $1.0B
5% -15% 1.0x $0.5B
0% -20% 0.0x $0.0B Strategic Financial Strategic Financial Strategic Financial Strategic Financial
Notes: 1) These deals are highlighted on the Slide 25 in orange. 2) Most recent quarter’s growth compared to year prior as of acquisition date. 3) Earnings Before Interest, Taxes, Depreciation and Amortization over the last twelve months as of acquisition date. 4) Implied enterprise value of transaction relative to most recent quarter’s revenue multiplied by 4. Sources: S&P Capital IQ and SVB analysis. State of the Markets 26 Appendix
State of the Markets 27 Report Authors
Bob Blee Steven Pipp, CFA Head of Corporate Finance Research Manager [email protected] [email protected]
Bob Blee heads SVB’s Corporate Finance Group, which provides Steven Pipp is a Research Manager based in San Francisco, CA, commercial banking, lending and guidance to late-stage responsible for capital markets research and data-driven analysis of corporate technology clients throughout the United States. the innovation economies that SVB serves globally.
Previously, Bob held a variety of roles in SVB’s California and Prior to his research role, Steven managed advisory and valuation Midwest geographies, most recently heading seed, early and engagements for venture-backed technology companies as part of mid-stage Infrastructure, Hardware, Consumer Internet and SVB Analytics. Before joining SVB, Steven worked in Minneapolis, Fintech banking in the Bay Area and Southern California, as MN, as a consultant and entrepreneur in clean energy technology. well as SVB’s national Mezzanine Lending practice. Steven earned a Master of Science in Finance from Boston College and Bob sits on the nonprofit board of the Network for Teaching a Bachelor of Science Business from the University of Minnesota. In Entrepreneurship (NFTE) and the Silicon Valley Advisory addition, he holds the Chartered Financial Analyst (CFA) designation. Council of the Commonwealth Club. He is also active with his alma mater, the University of Illinois.
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