At the 2018 year-end holidays, venture capitalists celebrated an unprecedented year of investment activity, certain that it could not be repeated. Now that the books on 1Q19 are closed, the pace seems to have only modestly unabated from an historic 4Q19 with $32.6 billion invested in 1,853 companies. All of this was punctuated by the Lyft IPO in the second to last day of the quarter.
While the activity in 1Q19 was indeed down from the prior quarter, it was still the second highest month in nearly 20 years. Now that the S&P 500 Index is effectively back to its all-time high set in September 2018, the anticipation of sustained unicorn IPO activity has bolstered investor confidence. All of this is further energized by the 3.2% GDP growth in 1Q19.
Evidence of continued concentration of capital, by company and by venture capital fund, persists. The top ten deals accounted for $10.3 billion of the quarter’s activity (0.5% of the deals represented 32% of the capital). As encouraging as the overall 1Q19 activity might appear, there are also some other notable vexatious trends buried deeper in the data. Seed investment activity was largely flat in terms of dollars invested, but there was a marked reduction in the number of seeded companies – nearly a 200 company decrease quarter-over-quarter. The median seed round was $1.0 million at a pre-money valuation of $7.5 million.
Even more notable was the decline in the number of early stage financings (Series A and B) from 1,013 to 828 quarter-over-quarter. Might this suggest increased investor aversion to early stage risk? The median round size in 1Q19 was $8.2 million which is substantially larger than the 2018 median of $6.0 million. In aggregate, median pre-money valuations for the early stage category was $32.0 million, up sharply from the $25 million for all of 2018. If investors were nervous, they certainly seemed to be at risk of over-capitalizing companies at historically high prices. Nearly 42% of all early stage financings were greater than $10.0 million in size, accounting for almost 90% of all the capital invested. There were 15 “early stage” rounds greater than $100 million. Quite clearly concentrated investments around fewer, presumably, very high potential opportunities.
Median Pre-Money Valuations
Nearly $21.4 billion was invested in late stage opportunities (Series C and D) in 1Q19 which was two-thirds of all capital deployed in the quarter. Of the 538 late stage investments, 62% of them were greater than $100 million in size. Another sign of capital concentration. Quite remarkable was the dramatic step-up in pre-money valuations when companies were able to graduate from Series C to Series D, with median Series D valuations of $345 million.
Median Pre-Money Valuations
There were a handful of other interesting items in the 1Q19 data, including…
- Corporate venture capital investors participated in 17.1% of all deals this past quarter; those deals accounted for nearly 60% of all dollars invested. Quite clearly, corporate investors tend to join later stage syndicates, when the start-up has solutions that are ready for prime time
- Somewhat counter to the theme of concentration, only 30.1% of all financings were for software companies which is down from the 34.8% for all of 2018. A number of new categories are emerging (autonomous vehicles, etc) which is leading to a greater diversity of sectors.
- Geographic concentration continues apace though. Three MSAs (Bay Area, New York metro, Boston) captured 75% of all 1Q19 capital invested yet represented only 40% of the deals.
The aforementioned Lyft public offering accounted for nearly 50% of the quarterly exit activity (based on the $21.7 billion valuation at the time of the IPO which now seems like a rather distant memory). There were 137 exits of venture-backed companies in the quarter, of which only 12 were IPOs – the dramatic fall-off was due in large measure to the government shut-down. The top 10 M&A transactions generated $18.7 billion of proceeds; between those transactions and Lyft IPO, 87% of the exit value went to 8% of the transaction. Further concentration.
A word of caution. The Economist recently reported that the dozen recently and soon-to-be listed unicorns recorded operating losses of $14 billion last year. Cumulative losses for those companies were $47 billion which is precisely the amount the entire venture industry invested in 2013 (or nearly 5x all the capital raised by venture firms in 1Q19 – see below).
One of the truisms of the venture capital industry is that liquidity (or the promise of it) drives fundraising activity. Notwithstanding the recent difficult trading dynamics of Lyft, the very successful Zoom and Pintrest IPOs provide hope that the pipeline of unicorns will finally be released from the private market corral. This past quarter 37 funds raised $9.6 billion with a median fund size of $103 million, which is up substantially from the 2018 median of $80 million. The average fund size was $259 million, given that the top five funds raised accounted for $5.4 billion (14% of the funds raised captured 56% of the dollars). Notably, there were 11 funds raised which were smaller than $50 million, and only two of them were first-time funds raised and they were so small that they did not even register in the data for capital raised. Evidence of even further concentration.
Determining the precise size of the US venture capital industry is challenging, but analysts tend to peg it at around $300 billion of assets under management (of course, SoftBank’s $100 billion Vision Fund complicates this even further). Given that, it is often useful/instructive/entertaining to put all of this activity into some broader context.
- Blackstone in the past twelve months alone has raised $126 billion in investable assets, effectively equivalent to what the US venture capital industry invested in all of 2018.
- Berkshire Hathaway has a cash balance of $110 billion.
- Last month, the Saudi national oil company Aramco disclosed preliminary plans for its $100 billion IPO, which is expected to come to market in the next 12 – 24 months. It was also revealed that Aramco is the most profitable company in the world given it’s absurdly low $3 per barrel oil extraction costs, making it wildly more profitable than venture-backed SaaS companies.
- BlackRock’s $2 trillion iShares exchange-traded fund had $31 billion of inflows in 1Q19 – as much as the entire US venture industry invested.
- And Tianhong Yu’e Bao money market fund in China, which is part of Ant Financial which is affiliated with Alibaba and has 588 million investors, has ~$168 billion under management. That fund was launched in 2013. Ponder that.
And in the possible good news category for 2Q19, the infamous yield curve inversion in March, which is one of the most reliable recession predictors, seems to have corrected itself. We will see in 90 days.