Basking in Basque…

It is impossible to not appreciate the fierce sense of independence when traveling in the Basque Country. While I was fortunate to leave right before the brutal heat of the past month, it is clear that the somewhat tortured regional history of the last half century still influences much of the current narrative, and arguably this political history has influenced the healthcare framework now managing the 2.2 million residents of this beautiful but complicated region.


For the nearly four decades since the end of the Spanish Civil War in 1939 until the establishment of the Spanish Constitution in 1978, this region was a set of quite independently governed territories which suffered through considerable political turmoil. The Constitution provided for a much greater degree of home rule and autonomy but was overshadowed by the rise of the Euskadi Ta Askatasuna (ETA) separatist group. While the ETA was formed in 1959, the period between 1968 – 2010 saw significant terrorist activity with nearly 1,000 political killings. Since the permanent cease fire in 2011, the Basque Country has enjoyed relative stability and prosperity; GDP per capita is 33% greater than the rest of Spain and 40% above the average for the European Union.

Arguably the history of this region was most poignantly captured by Pablo Picasso’s Guernica masterpiece which famously portrayed the German bombing of that town in 1937.


With political stability came a concerted effort by the government to address what was increasingly becoming the next crisis – chronic disease for an aging population. Healthcare expenditures in Spain are approximately 10% of GDP and rising. In 2010, the government issued the “Strategy to Tackle the Challenge of Chronicity in Basque Country,” and while a mouthful, this manifesto reflected an effort to create a more effective and responsive healthcare infrastructure. Echoing the region’s history of independence, what emerged was a centralized set of operating principles but with significant flexibility to empower frontline healthcare workers.

The Basque Health Service is called Osakidetza (established in 1984) and is the public entity that organizes the 13 integrated health organizations and employs the 12,400 providers in region. Central to these initiatives is to encourage much greater care coordination, as well as use of in-home health and telehealth services. Analysts have compared this system to the Canadian healthcare system and have observed that most Medicaid programs in the U.S. do not have these levels of innovation and autonomy.

There were two other fascinating observations from the Basque Country. To the east, the Catalonia region also struggled with self-determination and how best to govern within the borders of Spain. While the Basque Country often suffered through violent unrest over those many decades, the Catalans were relatively content through that period, that is until the past few years when there has been significant separatist unrest. Recall the horrific Barcelona terrorist attacks in the summer 2017.

It was also quite surprising to learn that, while there are only 2.2 million residents in the Basque Country, the diaspora is vast. It is estimated that between 2.5 – 5.0 million Basques live in Chile alone. The largest cluster of Basques in the U.S. is in Boise, Idaho where the Basque Museum and Cultural Center is located. I never did learn why Boise.


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Flare Capital Lands #1 Draft Choice…

If a venture capital firm is like a baseball team, we may have just used the first pick in the draft to grab a terrific utility player with extraordinary range: he can hit for power, field anything that is hit to him, and is an all-around great teammate. Please welcome Ian Chiang to Flare Capital Partners.

On the heels of announcing a new dedicated healthcare technology fund, we are thrilled to announce that Ian Chiang has joined the firm as a Principal. Ian has been committed to the transformation of the “business of healthcare” over the course of his impressive career. Most recently, he served as a Senior Vice President and a founding member of CareAllies, Cigna’s family of multi-payer provider services, population health management, and home-based care businesses. All super relevant to our investment focus.

I first met Ian over six years ago just as he was launching his healthcare start-up, XcelDx, and remember being incredibly struck by his depth and humility. XcelDx ultimately partnered with Scanwell Health, a smartphone-enabled diagnostics company, a company he still advises. This experience led him to CareAllies, where he was responsible for developing new technology-enabled services, evolving existing solution and service lines, and providing on-going product management across CareAllies’ businesses.

Ian also spent five years at McKinsey & Company advising healthcare clients globally, as well as two years at Becton, Dickinson & Company, where he led new product development. And he is super smart, having earned his Bachelor of Science degree in biological engineering from Cornell University, where he graduated with honors and was a Cornell Presidential Research Scholar. As if that was not enough, he also holds an MBA from Harvard Business School.

It is pretty clear to all of us that Ian will be a lightning rod for great entrepreneurs and that he has a terrific network among executives at some of the leading healthcare companies in the world, but what really got me was our shared (tragic) love for the New York Mets. Did you happen to see what they did late Friday night?!? Bottom of the ninth and they scored four runs to win on a walk-off single by Conforto. Simply Amazin’. And guess who texted me right after? Ian “Syndergaard” Chiang!

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Health Tech: What’s Not To Like?

There were a number of very exciting developments in the healthcare technology sector this past quarter. After a relatively modest investment pace in 1Q19 of $1.0 billion, nearly $3.2 billion was invested in 119 companies in 2Q19 according to Rock Health data, suggesting that the investment pace this year may be slightly ahead of last year’s record high of $8.2 billion. This level of activity reflects what continues to be an extraordinary market opportunity as the “business of healthcare” is transformed. Industry dynamics today demand innovative business models and novel technologies that will leverage advanced analytics and mobility to enable value-based healthcare. The overarching pressures for better outcomes at lower costs will create important and valuable new companies.

Furthermore, the adoption of healthcare technology solutions is accelerating. Many companies launched earlier this decade can now point to measurable impact on outcomes and costs. Companies more often than not are able to claim real attribution for the successes of their products and services; that is, they are able to calculate an ROI with actual data. Repeatable business models are now better understood (product development timelines, successful “go-to-market” strategies, etc.) and more predictable. What this really means is that entrepreneurs are able to consistently build big businesses. The sector is reaching an important threshold level of maturity and investors are recognizing that.

1H19 Healthtech

In addition to the level of investment activity, there were a number of other strategic developments and announcements in the healthcare technology sector this past quarter. Investors eagerly anticipated the very notable IPOs of Livongo, Health Catalyst and Phreesia (all priced in July 2019) and were excited about the building backlog of other IPO candidates. While there were only a dozen significant M&A transactions, some of them were potentially transformative such as Dassault System’s $5.8 billion purchase of Medidata, UnitedHealth Group’s acquisition of PatientsLikeMe, and Best Buy’s acquisition of Critical Signal Technologies. There were also a number of smaller acquisitions, but nonetheless very notable, such as Apple’s acquisition of Tueo Health, which speaks to the attractiveness of the sector from non-healthcare companies.

Product releases such as Alexa Skills for healthcare or the Centers for Medicare and Medicaid Services expanding access of telehealth services for Medicare Advantage members deepen the narrative that healthcare technologies will continue to be a core part of delivering care in non-traditional settings. Additionally, the Food and Drug Administration announced a streamlined regulatory framework with its “Digital Health Software Precertification Program” which underscored the sector’s importance.

Against a backdrop of extraordinary overall venture capital liquidity in 2Q19, and with the very well-received IPOs of Livongo and Health Catalyst two weeks ago, a fair question is to look closer at investor liquidity in the healthcare technology sector. Rock Health (disclosure: Flare Capital is an investor in Rock Health’s seed fund) analyzed in detail the $36.3 billion private capital invested in the 1,274 digital health companies that they track since 2011, concluding that $29.4 billion is still “at work.” There are 23 companies which have raised over $7.9 billion that are both mature and likely IPO candidates, suggesting significant potential liquidity for this sector. Importantly, only $1.5 billion was invested in companies that were shut down, which is a relatively modest capital loss ratio given the typical risk profile of venture capital investments (of course, some of the $4.1 billion of M&A activity is likely quite underwhelming).


1H19 Health Liquidity

Arguably, healthcare is one of the cornerstones of any impact investment strategy. Recent public equity investor attention has become quite fixated on the “socially responsible” impact sector. Notably, in 1H19 those funds experienced record inflows of $8.4 billion according to Morningstar adding to the roster of public equity healthcare investors. In all of 2018, there was $5.4 billion invested in these funds, bringing the five-year total to $35 billion. Hopefully, healthcare technology will continue to be a sector where one can “do good and do well” at the same time.

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Let the Good Times Roll – 2Q19 In Review…

Accelerating out of 2Q19, both the S&P 500 and Nasdaq indices hit all-time highs, trading at close to 19.8x trailing earnings. Last week the U.S. Bureau of Economic Analysis announced that GDP increased 2.1% for the quarter, and while a marked decline from the prior quarter, it was still a reasonably compelling figure. Interestingly, consumer spending which accounts for approximately 70% of the activity, increased 2.9% in the quarter (although credit card delinquencies are up 22% since 2015). Macroeconomic Advisors estimated that revenues for the S&P 500 companies grew 2.6% in 2Q19, while FactSet estimated that earnings declined 1.9% year-over-year (first time in recent memory), perhaps suggesting that operating costs have increased markedly over the past few months.


2Q19 GDP

Source: Axios

Against this narrative, the National Venture Capital Association and Pitchbook released their 2Q19 report with screaming headlines about investor liquidity. Quite simply, it was a tremendous quarter with $138.3 billion of exit value created (via either IPOs or M&A transactions), nearly half of which was due to the Uber IPO alone. Year-to-date exit value totaled $188.5 billion, more than any prior year, suggesting broad-based activity and a robust environment. And there will be even more to come: CB Insights is tracking 362 “unicorns” globally, 18 of which are valued in excess of $10 billion each. These mature private companies will seek investor liquidity at some point in the near future.

For the entire quarter, there were 2,338 financings which raised $31.5 billion, keeping the venture capital industry on pace to once again exceed $100 billion in annual investment activity. While the number of investments has been relatively constant since late 2012, the advent of “mega deals” (in excess of $100 million round sizes) has dramatically increased the amount of capital invested. Year-to-date there have been 123 “mega deals” which, while only 2.5% of all financings, accounted for nearly 45% of the capital invested.


2Q19 VC Activity

The amount of seed and angel activity continued to meaningfully decline in the quarter, registering $1.7 billion across 1,001 deals. The median age of those companies at the time of these financings was slightly over three years old, suggesting that the amount of “pre-seed” activity is high and now an important part of how many entrepreneurs are funding their businesses. In part due to the proliferation of accelerators and incubators, entrepreneurs are able raise very modest amounts of capital to accomplish a handful of initial milestones. The average size of these financings was $1.7 million at a median pre-money valuation of $7.6 million.

Early stage activity (Series A and B rounds) remained relatively constant with $8.9 billion invested in 754 deals (average size of $11.8 million). The median valuation was $30.0 million. Late stage financings (Series C and D rounds) continued to account for much of the activity with $20.9 billion invested in 583 deals (average size of $35.8 million). It is these rounds when there starts to be significant separation in terms of amount of capital invested and valuations, particularly for those companies that are scaling quickly. Series C median valuation in 2Q19 was $115 million, while Series D companies commanded a median valuation of $418 million. Over 70% of the capital of the Late stage financings was invested in “mega deals” yet were only 17% of the companies. To underscore the separation at these Late stage rounds, the 25th percentile companies were valued at $140 million on average, while 75th percentile companies were valued at $1.08 billion (as compared to $702 million in all of 2018).

Notably, corporate VCs are hanging in there. In 2Q19, 311 companies raised $13.0 billion in financings which a corporate investor was a member of the syndicate; that is,13% of the financings included a corporate investor yet those rounds accounted for over 41% of the investment activity, indicating that corporate investors tend to participate in later rounds.

Back to where the attention was focused this past quarter – exit activity. In addition to the more notable IPOs of Uber, Lyft, Pinterest and Zoom was the Slack IPO, which was a “direct listing” like the Spotify IPO in April 2018. Many recent enterprise technology IPOs have been priced at 25 – 30x revenues (not earnings). Notwithstanding the extraordinary IPO activity in 2Q19 ($130.8 billion), the M&A exit activity was relatively underwhelming with only $7.3 billion versus $22.6 billion in 1Q19 and $10.7 billion in the year ago quarter. In fact, year-to-date the ratio of number of new investments to exits is 12.7x. Historically, this ratio has hovered between 10.0x – 10.5x so the growing backlog of private companies is notable, especially with the number of large rounds with somewhat impatient later stage investors. Bookmark that.


2Q19 Exit

As this liquidity windfall is distributed back to investors, grateful limited partners are expected to recycle much of it back to venture firms in the form of new commitments, suggesting good times ahead for fundraising. Through the first half 2019, 103 funds were raised totaling $20.6 billion. In 2Q19 alone, 66 funds raised $11.0 billion but only two funds were larger than $1.0 billion. Interestingly, in 1Q19 the average and median fund size were $259 million and $103 million, respectively. At the end of 2Q19 those amounts had declined meaningfully to $202 million and $81 million, indicating a trend of much smaller fund sizes. There was an even more dramatic decline in the number of “first time” venture funds with only 10 raised through 2Q19, and they were only 2.9% of all capital raised. Yet against this backdrop, SoftBank just announced its second Vision Fund totaling $108 billion of commitments.

According to Cambridge Associates, venture returns through 1Q19 have been consistently compelling when compared to public stock indices, certainly over longer time horizons. The lack of liquidity is often pointed to as the principle reason as to why limited partners are not more aggressive venture capital investors. The narrative over the last decade has been one centered around “unrealized gains” which have been dramatic but unfortunately unrealized. In a recent Fenwick & West survey of venture terms for 215 financings in 2Q19 over 86% were “up-rounds” (the average price per share increase was 58%). It will be fascinating to see if limited partner sentiment recalibrates over the next 6 -12 months as the 2Q19 IPO liquidity is distributed.

VC Returns 1Q19

As an interesting point of comparison, the venture market in China has struggled mightily in 2Q19. Notwithstanding that the Fortune Global 500, which was released this past week, included 129 Chinese companies (first time ever that the U.S. did not lead in the medal count), the overall investment activity declined a dramatic 77% decline from 1Q19. The $9.4 billion invested across 692 companies compares unfavorably to the 2Q18 level of $41.3 billion. Quite clearly there is anxiety about trade tensions as well as relatively lofty private company valuations. Interestingly, though, China last week launched the Science and Technology Innovation Board (“STAR Market”), which is part of the Shanghai stock exchange but only for local investors. On the opening day, 25 technology companies raised $5.4 billion, with the index closing ahead 140%. Go figure.

Somewhat insulated from this is the Israeli venture capital industry which saw $3.9 billion invested in 254 companies year-to-date. In 2Q19 alone, 125 companies raised $2.3 billion, but $1.2 billion of those financings were for only 10 “mega deals” (considered greater than $50 million round size).

The Institute of International Finance recently released its quarterly survey of global debt levels that showed it to be $246.5 trillion at the end of 1Q19, which had increased by $3.0 trillion over the quarter. This unprecedented debt level is now 320% of global GDP. The situation in the U.S., while relatively in better shape, is still worrisome with $69 trillion of debt at 101% of GDP. The role this plays on the venture capital industry and fund flows is certainly worth monitoring. Quite clearly, the current environment has investors desperately looking for returns with high growth companies such as those in venture capital portfolios. As a point of comparison, Facebook, Amazon and Google grew revenues 28%, 19% and 19%, respectively, this past quarter. But are we living on borrowed time with the historic economic expansion in the U.S.?


Source: Axios

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Flare Capital Raises Its “Series B” …

This week we announced the close of Flare Capital Partners II, L.P. with a total of $255 million of committed capital.

This fund is considerably larger than our prior fund, which in large measure reflects what continues to be an extraordinary market opportunity as the “business of healthcare” is transformed. Industry dynamics today demand innovative business models and novel technologies that will leverage advanced analytics and mobility to enable value-based healthcare. The overarching pressures for better outcomes at lower costs will create important and valuable new companies.

Blah, blah, blah. Many of us already know all of that. Here is why the fund’s timing is so propitious. Adoption of healthcare technology solutions is accelerating. Many companies launched earlier this decade can now point to measurable impact on outcomes and costs (see IPO pipeline of healthcare technology companies). Companies more often than not are able to claim real attribution for the successes of their products and services; that is, they are able to calculate an ROI with actual data. Repeatable business models are now better understood (product development timelines, successful “go-to-market” strategies, etc.) and more predictable. What this really means is that entrepreneurs are able to consistently build big businesses. The sector is reaching an important threshold level of maturity.

HC Adoption Accelerating

When we closed the last fund in 2015, according to Rock Health data, the digital health sector saw approximately $4.6 billion invested, which stayed relatively constant into 2017. The investment level in 2018 spiked to $8.1 billion and the year-to-date investment pace suggests that 2019 will be even greater. In addition to a number of large and transformative M&A transactions over the last two years which redefined the landscape, an exciting bullpen of private healthcare technology companies are emerging which should be well-received by public company investors (see Livongo, Health Catalyst, Phreesia, etc.).

As a point of comparison: the U.S. advertising industry is approximately $200 billion in size, and as that industry was profoundly re-architected over the past 20 years, arguably several trillion (with a “T”) dollars of market capitalization was created (Google, Facebook, Apple, Netflix, Twitter, etc.). Important companies were created, consumer purchasing behavior and entertainment choices were forever changed.

Now turn your sights to healthcare. The U.S. healthcare industry is 15x as large as the ad industry. And while it may be harder, and there will be fits and starts, there is a sense of inevitability that enormously important and valuable healthcare technology companies will be created as this industry is transformed. There is no denying that scaling healthcare technology companies is hard, at times frustratingly and quixotically so, but the pressures are simply too great for industry participants to not embrace innovative new solutions. That is the essence of our investment thesis.

Core to our success has been the level of engagement with our investors. We initially set out to raise $200 million, the same size as the prior fund. It was gratifying to see both the level of investor interest and understanding of the market opportunity. As such, we are excited to welcome a number of new strategic and financial investors as partners of the firm, who will further strengthen our franchise and reputation in the market. Given the industry complexities, our strategic investors are particularly helpful to our portfolio companies as co-investors, channel partners and customers.

While this is an important milestone for Flare Capital, we will continue to be heads down assisting our entrepreneurs to build important and valuable healthcare technology companies. We expect to close the first investment out of the new fund within the week.


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Blood Money…

Not sure if it was the penultimate episode of “Game of Thrones” or recent press coverage of Ambrosia LLC, which was marketing, and subsequently reprimanded by the FDA, “longevity” blood plasma transfusions for $8,000 that caused me to look more closely at the blood supply industry. And what a strange set of dynamics at work – a product with a relatively short shelf life, largely dependent on donors, and one that appears to have terrific gross margins. With advances in technology and business model innovation, the amount of blood required to meet current needs has dropped dramatically but unfortunately for an increasing number of individuals, their precise blood type has likely become very hard to find.

First, some context. Over 13.6 million units of whole blood are collected every year in the U.S. for the 4.5 million Americans who will require a transfusion which is nearly 40,000 units every day. In order to satisfy that demand, an estimated 6.8 million people donate blood each year, which means that of the 37% of the U.S. population eligible to donate, only 10% will do so. According to the World Health Organization, 112.5 million units were collected in 2017 (equivalent to over 21 Olympic-size pools). Blood, for which there is not a synthetic substitute, has a shelf life of no more than 42 days (platelets are only 5 days) which complicates the supply chain. Blood accounts for roughly 7% of one’s body weight.


The blood collection and bank industry has struggled in recent years. Analysts estimate that revenues were in excess of $5 billion in 2008 and are now well below $1.5 billion, in part due to advances in surgical techniques which simply require less blood per procedure, better electronic medical record capabilities, and the introduction of more “at-risk” economic models causing providers to look harder at blood usage. Blood is one of the most expensive items ordered solely at the doctor’s discretion.

While every hospital has blood bank and transfusion capabilities, the American Red Cross accounts for approximately 45% of all donations, with the balance largely collected by the America’s Blood Center, a national network of 600 non-profit collection centers. There are a number of commercial entities, such as CSL Pharma, which provide blood collection and screening services and will pay for blood donations.

This is where it starts to get tricky. While initial “starter” payments for a unit of blood may be as high as $50, typical payments run closer to $30. Power donors can give twice a week which means people can make over $3,000 per year – which is likely to appeal to the most desperate of us. Analysts estimate that plasma companies, once that unit of blood is processed, sell wholesale immunoglobulin for $300 per unit. Academic research from Case Western Reserve suggests that commercial plasma collection centers are disproportionately located in poor communities, an observation disputed by the Plasma Protein Therapeutics Association (PPTA). The PPTA represents over 750 commercial collection centers.

This is a big business. Globally, there were $32.9 billion of blood products sold in 2017 and Global Market Insights projects that to increase to $42.6 billion by 2021. Worldwide, $7.5 billion of blood products are exported annually so much of what is collected is consumed locally. The U.S. is the second largest blood exporter with $1.1 billion or 15% of the total; Ireland is the clear export leader with $2.7 billion or 36% of all export volume. There is an obvious correlation to beer consumed.

Over the last century tragic events such as world wars drove blood collection innovation. While the first transfusion in recorded medical history was attempted in 1628 shortly after the English doctor William Harvey determined that blood circulates. It wasn’t until 1665 – 37 years later – that the first successful transfusion occurred when another English doctor (Richard Lower) transfused blood between dogs. The first U.S. blood bank was established in 1937 at Cook County Hospital in Chicago.

As many of us learn, and quickly forget in high school biology, there are eight blood types (A, B, AB and O, with positive and negative for each) and over 360 types of antigens according to the International Society of Blood Transfusion, making it a universal yet supremely complex fluid. Type O negative can be given to anyone, while only 3% of people in the U.S. have AB positive blood. Dramatic advances in screening and testing over the last 75 years have nearly eliminated risk of disease transmission via transfusions. The risk of getting Hepatitis C, a viral infection of the liver, is now 1.2 per 100k transfusions per PubMed data.

While advances in blood screening have increased the availability of blood, differences among ethnicities have complicated supply chain issues and caused some heated public debate about the “ethnicity of blood.” Industry analysts point to globalization as having increased the complexity of managing the blood supply. According to researchers at the National Center for Blood Group Genomics, geographic differences due to historic exposure to certain diseases and pathogens undoubtedly led to evolutionary differences in blood types which has been conflated with the role of ethnicity and blood types.

The blood supply chain is further complicated by regional differences in surgical practices. The number of surgeries per 100k of a population tends to correlate to country GDP. According to most recent data from IndexMundi, Ethiopia registered a mere 43 surgeries per 100k (2011) while astonishingly, Australia had over 28,900 surgeries per 100k (2015).

Unfortunately, a significant “driver” of blood needs are traffic accidents. It is not unusual for one victim of a car crash to need up to 100 units of blood. One of the great promises of autonomous vehicles is the expected dramatic drop in traffic fatalities. Perversely, such a development will dramatically reduce the number of life-saving organs available for transplant. The National Safety Council estimates that 380 people are likely to have died on U.S. roads this Memorial Day holiday period. Very sobering.

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Dazzling VC Activity in 1Q19…

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.


1Q19 VC

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

1Q19 A B Valuation

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

1Q19 C D Valuation

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.


yield curve


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