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State of the Venture Capital Industry MARKET ANALYSIS Summer 2019

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Table of Contents

3

5

9

Introduction

Fundraising

Investing

16

20

24

Valuations

Exits & Returns

Conclusion

2019 State of Ve nture Cap ital | 2


Introduction

2018: The Market Continued Full Steam Ahead Although 2017 was a remarkable year during which the industry set numerous new records, these were eclipsed by the records broken once again in 2018. Many of the noteworthy trends of 2017 continued in 2018, and have carried into 2019.


Introduction

The market continued full steam ahead 2018 TRENDS

Mega Funds Set Records

Venture capital funds sized over $1 billion contributed to the industry’s post-Internet era fundraising record.

Mega Rounds Became Norm

Large late stage venture financings became the norm and drove all-time highs for invested capital.

US Embraced Electric Scooters

Bird, Lime, and other scooter companies took US markets by storm and absorbed meaningful amounts of capital.

China Tech Grew

China continued building the largest tech companies and attracting more share of venture dollars globally.

Crypto Markets Fell

After capturing the minds and wallets of investors, crypto currency markets tumbled. Despite the record-setting trends of 2018 (above), the latter highlights that not all headlines were positive – crypto currency markets fell from $831 billion in January 2018 to $130 billion at year-end. However, crypto asset prices have since started to recover as blockchain technology innovations continue to attract entrepreneurial and technical talent, as well as capital, to the emerging sector. For example, initial coin offerings (ICOs) grew both in count and dollar value in 2018. In fact, crypto asset ICOs in 2018 raised more than twice the dollars of ICOs in 2017, which was a frenzied year of speculative behavior. The financial markets ended 2018 on a decidedly negative note, thereby casting some uncertainty about what 2019 might have in store for the venture industry. The public markets took a hit in the fourth quarter, leading U.S. stock indexes to suffer their worst losses since 2008. Stock market volatility was high, too, and technology was one sector that bore the brunt. While 2018 saw a meaningful improvement in venture-backed initial public offerings (IPOs), industry participants were left wondering whether the markets, as well as the government shut down, would dampen expectations for the many highly anticipated IPOs in 2019. The market, however, made up its fourth quarter losses early in 2019, and the government ended the shutdown, thereby alleviating concerns that the window might shut for IPOs in 2019. In the following pages, we delve deeper into the fundraising, investing, valuation and exit statistics of 2018. We turn our attention to industry trends such as the rise of China and the promise of 5G technology. And we summarize how the venture industry is shaping up in 2019. The venture ecosystem continues to evolve as investors adjust to the sustained high levels of capital and competition across the industry.

2019 State of Ve nture Cap ital | 4


Fundraising

Fundraising accelerated Since 2009, fundraising in the U.S. venture capital industry has been on the rise. Median and average sizes of U.S. venture funds hit highs during 2018. Additionally, both the amount of capital and the number of funds raised have increased annually during seven of the last nine years.


Fundraising

Fundraising rebounded, hitting post-Internet bubble high

Capital has become weaponized as a way to create a competitive moat around a startup’s business — ostensibly giving it so much money that investors become de facto kingmakers for the companies they back, rather than simply enablers for success. - Jonathan Shieber, TechCrunch

The $53.5 billion of capital that was raised in 2018 represented a 43% increase over 2017, a 249% increase from 2009, and a record high since the Internet bubble in 2000. The number of funds raised represented a 264% increase from 2009. Yet the number of funds raised in 2018 declined year-over-year, while capital raised increased, which reflected a resurgence in mega funds. In 2018, 11 venture firms closed on funds that totaled $1 billion or more, compared to five that reached mega status in 2017. While larger fund sizes allow venture capitalists to follow-on and support their best-performing portfolio companies, particularly as those companies are staying private longer, larger fund sizes are also driven by competitive dynamics. From a venture capitalist’s perspective, it’s a competitive advantage to be able to be the primary, or sole, source of funding for certain companies throughout their life cycles – this is described as “full stack” venture funding. From a startup’s perspective, capital can be a weapon to battle competing companies for customers and hires.

US VENTURE FUNDS

RAISED

53.5B

$

524

Total US Venture Capital Raised 90

Capital ($B)

80

600

500

70

400

60 50

300

40

200

30 20

100

10 0

No. Funds

0 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 2018 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Dow Jones LP Source as of December 31, 2018.

2019 State of Ve nture Cap ital | 6


Fundraising

Early stage fundraising crept higher Seed/Early Stage US Venture Capital Raised 45

Capital ($B)

450

No. Funds

40

400

35

350

30

300

25

250

20

200

15

150

10

100

5

50

0

0 2000 01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

16

17 2018

Dow Jones LP Source as of December 31, 2018.

Some are quick to portend ‘a new bubble’ but…that would be a misunderstanding of the market and, in fact, by historic levels, this may be amongst the best times to invest in seed and early stage funds. - Mark Suster, Upfront Ventures

Seed and early stage capital raised in 2018 increased, but not to the same degree as the overall market. The $16.8 billion raised by seed and early stage funds represented a 12% increase over 2017, but fell short of the recent high of $17.2 billion raised in 2016. In fact, fundraising totals in this segment of the market have stayed relatively stable, hovering around $16 or 17 billion, over the last four years. At the same time, the overall market, driven by fundraising for mega funds and the later stage segment of the market, has exploded. As with the overall market, the number of seed and early stage funds raised decreased in 2018; 382 funds were raised, compared to 419 funds the prior year, representing a 9% decrease. The market was particular robust for first-time fund managers, most of which are categorized as seed and early stage investors. According to the NVCA, these managers raised $5.3 billion across 52 funds in 2018, which marked a decade high for both amount raised and fund count. Not surprisingly, the average sub$100 million fund size continued to increase in 2018 as fund sizes across all stages of the market crept higher.

US VENTURE FUNDS

382

RAISED

$

16.8B

2019 State of Ve nture Cap ital | 7


Fundraising

Capital remained concentrated; active firm count increased A relatively small number of firms dominated fundraising, reflecting a “flight to quality.” In 2018, 11 firms represented 55% of the capital raised in the U.S. By and large, the experienced investors with unique and sustainable competitive advantages, strong track records, and excellent reputations among entrepreneurs and limited partners continue to raise sizable pools of capital today. While fundraising headlines are eye-popping, it’s worth looking closer at the data to understand how many firms are most active in deploying this capital in any given year. To estimate the number of active firms in the market, we analyzed the number of firms that raised capital in 2018 and in the previous four vintage years. We then analyzed the number of firms that invested in at least three and five companies each year. The first method – depicted by the green – proxies the number of funds with capital available for new investments, as venture investment periods typically span five years. According to this metric, 496 funds were within their investment periods during 2018. Although the number of active funds has fluctuated, the 2018 tally is notably 66% lower than in 2001, which marked the peak of the data set. To determine the number of truly active funds, we determined how many invested in three or more and five or more deals during each year. The long-term trend is clear and the industry has certainly right-sized since the internet bubble; however, there has been an increase in active funds since 2013 (despite a oneyear decrease in 2017). If we look at those funds that are most active (those invested in five or more deals annually), the number of active firms has decreased slightly from 241 in 2013 to 227 in 2018. This suggests that while the industry is well capitalized and active firms have increased in recent years, the firms that are most active have been relatively stable.

In 2018, 319 funds invested in 3+ deals, an increase of 10% year-over-year and 75% less than 2001. Similarly, 227 funds invested in 5+ deals, 8% more than 2017 and 81% fewer than 2001. Active VCs 1600

Active Funds

5+ Deals

3+ Deals

1400 1400

1200 1200

1000 1000

800 800

600 600

400 400

200 200 2000 0

2000

01

02

03

04

05

06

07

08

09

10

11

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

12 2012

13

14

2013

2014

15 2015

16 2016

17 2017

2018 2018

Thomson One as of December 31, 2018. Includes all US venture capital funds greater than $10 million that raised capital in 2018 and the previous four vintage years.

2019 State of Ve nture Cap ital | 8


Investing

Invested capital spiked higher Investments in venture-backed companies reached yet another new high in 2018. Across all venture stages, $130.9 billion was invested in U.S. venture capital, capping a decade of ever-increasing capital deployments to venture-backed companies.


Investing

Invested capital spiked higher The 2018 high of $130.9 billion invested easily eclipsed previous highs of approximately $83 billion invested in 2015 and 2017. Interestingly, this record amount of invested capital was deployed in only 8,948 deals, the lowest count since 2012. Similar to 2017, 2018 saw another marked uptick in investments into late stage and pre-IPO rounds. Average deal value across stages was $14.6 million, up over 67% from $8.7 million in 2017. This growth in average deal value is largely attributable to the continued popularity of late stage mega rounds – of the $130.9 billion invested in 2018, $61 billion went to rounds raised in excess of $100 million, and $81 billion to rounds over $50 million in size. In 2017, nearly half of all venture capital was concentrated in rounds of $50 million or more; in 2018, this percentage rose to over 60%.

With over $100 billion of funding for 2018 and a record number of mega deals, it is hard to imagine this investment pace continuing, especially in a year when financial markets are more uncertain. Some degree of cooling down is inevitable which overall will be a good thing for the health of the VC industry. - Joe Horowitz, Icon Ventures

Total US Venture Capital Invested Invested ($B)

No. Deals

12,000

140

140

12,000

120 120

10,000

10,000

100 100

INVESTED

$

130.9B

DEALS

8,948

8,000

8,000

8080

6,000

6,000 6060

4,000

4,000

40

40

2,000

2,000

20

20

0 2000 01 02 03 04 05 06 07 08 09 10

11

12

13

14

15

16

17

2018

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

0

Pitchbook/NVCA as of December 31, 2018.

2019 State of Ve nture Cap ital | 10


Investing

Startups are staying private longer Invested capital spiked higher due in large part to the fact that startups are staying private longer. The IPO window has extended an additional four to five years for the best and fastestgrowing companies, now 10+ years compared to the three-to-six year time frames typical of earlier tech companies. This has lead many investor dollars to shift from public to private markets as these companies pursue growth on a global scale. Value that once accrued to investors in the public markets post-IPO is now compounding in the private markets. Investors who were traditionally public-market focused have become increasingly active in late stage, high-dollar growth financings. This phenomenon has been coined the “private IPO.”

VC FUNDING PRE-IPO

LAST PRIVATE VALUATION

6

3 9M

$

23M

$

35M

$

$

100M

11

 

YEARS PRIVATE

The number of mega rounds ($100M+) completed increased by 151% since 2016, whereas the number of venture-backed IPOs only increased by 98%. This dramatic uptick in the number of mega rounds has contributed to the phenomenon now termed “private IPO.”

$

4.4B 31B

$

9 $

19.9B 72B

$

2019 State of Ve nture Cap ital | 11


Investing

Late stage activity ballooned INVESTED

82.4B

$

LATE STAGE DEALS

2,032

Mega financings are enabling the rapid growth of ‘full stack,’ vertically integrated startups that are disrupting traditional industries... Traditional venture funds have gotten bigger, and private equity and corporate investors have become increasingly active in venture – and all of those dollars are pouring into these large financings. - Patricia Nakache, Trinity Ventures

After rising moderately in 2017, late stage investing rose to a new all-time high in 2018 with $82.4 billion of capital invested. Although late stage deal count increased 10% to 2,032 in 2018 (up from 1,849 such deals in 2017), the amount of capital put to work was more noteworthy. The $82.4 billion of late stage capital deployed eclipsed the $47.0 billion invested in 2017 (an increase of 75%) and the previous high of $50 billion invested in 2015. Correspondingly, the average amount invested in late stage rounds increased to $43.5 million, an increase of over 57% year-over-year. This increased late stage activity reflects a continuation of several broader market themes. Participation and competition among late stage investors – such as public/private crossover funds, sovereign wealth funds (either directly or by backing SoftBank’s Vision Fund), and corporates - remained high, and mega rounds continued to finance the growth of successful startups that are staying private longer than ever before. As noted, mega rounds became the norm in 2018, nearly doubling in count to almost 200. In July, these rounds earned headlines when the number of $100 million+ venture deals reached an all-time high in a single month, and again in December when five companies raised $100 million+ rounds in a single day.

Late Stage Capital Invested 90

Invested ($B)

No. Deals

2,500

80 2,000

70 60

1,500

50 40

1,000

30 20

500

10 - 2000 01 02 03 04 05 06 07 08

09

10

11

12

13

14

15

16

17 2018 0

Pitchbook/NVCA as of December 31, 2018.

2019 State of Ve nture Cap ital | 12


Investing

Early stage investing continued to climb INVESTED

41B

$

EARLY STAGE DEALS

3,156

Consistent with the broader venture ecosystem, 2018 saw significantly more capital – $41.0 billion, a 43% increase over 2017 – invested into a comparatively static opportunity set, wherein early stage deal count rose slightly from 3,119 in 2017 to 3,156 in 2018. The net effect of this additional capital has been a notable uptick in average round size, which increased to $15.2 million in 2018 from $10.9 million in 2017 and $10.0 million in 2016. The growing size of Series A and B rounds is the result of an increasingly competitive marketplace and a shift in the maturity of companies raising early stage rounds. The past few years have seen notable changes in the time frames within which seed and early stage fundraising is structured, with seed rounds increasingly taking on historical Series A rounds in terms of size, participants, and pre-money valuation, and startups delaying Series A funding until certain performance metrics are established.

Although deal count remained relatively stable over the last five years, capital invested in early stage companies jumped higher in 2018.

Early Stage Capital Invested 45

Invested ($B)

3,500

No. Deals

40

3,000

35

2,500

30 25

2,000

20

1,500

15

1,000

10

500

5 -

2000 01

02 03 04 05 06 07 08

09

10

11

12

13

14

15

16

17

2018

0

Pitchbook/NVCA as of December 31, 2018.

As angel and seed investors are taking larger stakes, and as growth funds are often investing earlier, the role of early stage investors is evolving. Obtaining and protecting ownership has become increasingly difficult given these competitive dynamics.

2019 State of Ve nture Cap ital | 13


Investing

Volume of seed deals continued to fall For the second year in a row, seed stage activity increased in terms of capital invested, but decreased in terms of companies funded. $7.5 billion was invested into seed rounds in 2018 (up 3% from $7.3 billion in 2017), funding a total of 3,760 companies (down 17% from 4,521 in 2017). This trend of investing more dollars into fewer companies is congruent with broader trends in venture, and suggests the definition of seed has changed substantially. According to a report on the seed landscape, in 2010 less than 10% of seed companies (at the time they raised capital) were generating revenue, but by 2017 over 50% of seed companies were generating revenue. With the median deal size and post-money valuation for seed companies now at $2.2 million and $10.7 million, respectively, seed investors increasingly focused on maximizing ownership have opted to write larger checks at later points in companies’ development when signs of traction (i.e. users and revenue) are more clear. This kind of investor behavior is becoming the new standard in seed.

SEED STAGE DEALS

INVESTED

3,760

7.5B

$

Angel/Seed Capital Invested Invested ($B)

No. Deals

9

7,000 7,000

9

8

6,000 6,000

8

7

7

5,000 5,000

6

6

5

4,000 4,000

4

4

3,000 3,000

33

2,000 2,000

5

22

1,000 1,000

11 -

2006 2006

07 2007

08 2008

09 2009

10 2010

11 2011

12 2012

13 2013

14 2014

15 2015

16 2016

17 2017

2018 2018

-

Pitchbook as of December 31, 2018. Years prior to 2006 were excluded due to lower data quality.

2019 State of Ve nture Cap ital | 14


TREND : CHINA GAINS MOMENT UM & IT S OWN TECH IDENTIT Y

Commonly referred to as the technology copycat, China often borrowed ideas and innovations across all industries. In the fierce grip of the State, outsiders viewed China’s technology landscape as lacking the necessary ecosystem. Now, however, venture capitalists and entrepreneurs alike see China as a renewed opportunity. Market & Investor Momentum • A record number of Chinese investors (21) appeared on the Midas List in 2019, with Chinese companies comprising six of the top ten exits/unicorns. • China accounted for 30% of global venture capital investments in 2018, up from just 4% in 2013. • Chinese “big tech” (e.g. Baidu, Alibaba, Tencent) continues to fund Chinese startups, often with a strategic eye on acquisition or leveraging existing infrastructure to improve go-to-market strategy. • 2018 saw the rise of Bytedance, the creator of an AI-powered content platform, which raised $3 billion at an estimated $75 billion valuation to become the world’s most valuable venture-backed company. • Ride-hailing giant Didi-Chuxing, fintech provider JD Digits, and ecommerce company Pinduoduo were among other Chinese companies that raised rounds of at least $1 billion at huge valuations.  Rise of Chinese Consumers • By 2030, Chinese consumers will account for 12 cents of every dollar spent by urban consumers globally. • This working-age population is also tech savvy; China has more than 750 million internet users – more than the U.S. and Europe combined – and nearly one in five of these rely solely on mobile. This high level of mobile penetration has made it easy for consumers to test out and quickly adopt new innovations. • China is years ahead of the U.S. in replacing paper money. Mobile payments are used by a strong majority of Chinese internet users (68%), fueling incredible innovation and consumer spending in digital retail (e.g. JD, Alibaba). • China now accounts for nearly half of the world’s e-commerce transactions. Leader in AI • The Chinese government has made leadership in AI a national imperative. As a result, China’s largest technology companies are devoting billions to AI research, and companies such as Toutiao, Sensetime, Face++, and others have created ground-breaking AI-driven platforms. • The sheer size of China’s population and the tight control of its government over media and the internet gives China an advantage in availability of high-quality data that is required to develop high-performing AI.

2019 State of Ve nture Cap ital | 15


Valuations

VC valuations climbed higher than ever Seed and early stage pre-money valuations have risen steadily since 2009, increasing 288% and 332% over the period, respectively. Early stage valuations in 2018 increased 35% year-over-year, while seed stage valuations increased moderately by 17% over 2017. In a more dramatic upwards trend, late stage pre-money valuations continued to soar in 2018.


Valuations

Seed & early stage valuations hit new highs again Median Seed & Early Stage Pre-Money Valuations

The rise in seed and early stage valuations has occurred as the definitions of seed and early stage funding has evolved over the past few years. Both parts of the market have become increasingly segmented, and the historically clear division between seed and Series A rounds has been muddied as the average maturity of seed stage companies has increased over time (and with it the milestone expectations and metrics that venture investors want to see before funding Series A companies). Professing to fill preseed or post-seed funding gaps, a new breed of investor has come to the table to fill the void at the earliest stages of company formation and bridge the gaps to Series A rounds. The pre-seed space in particular has been further complicated by the recent proliferation of incubators and accelerators.

80

Seed Stage ($M)

60 50 40 30 20 10 0 2000 01

Early Stage ($M)

70

02 03

04

05 06 07 08 09

10

11

12

13

14

15

16

17 2018

Pitchbook as of December 31, 2018.

New micro VC funds are being formed each week…one of the easiest ways for them to differentiate themselves is on price – and not surprisingly, the valuations for seed stage companies are continuing to increase... [There has also been] a meaningful uptick in ‘full stack venture funding’…funds are quickly realizing that if they miss a company’s Series A round they might no longer be able to invest in any of the company’s future rounds. And this pressure to ‘win’ at the Series A is resulting in more sharp elbows at the Series A stage – and increased valuations. - Josh Kopelman, First Round Capital

2019 State of Ve nture Cap ital | 17


Valuations

Late stage valuations soared In 2017, the median late stage pre-money valuation rose from $137 million to $224 million – a historic 63% uptick. Another sizable jump occurred in 2018 when the median late stage deal was funded at a pre-money valuation of $325 million, a 45% increase over 2017. Late stage pre-money valuations increased markedly in 2018, exacerbating a long-term upwards trend since 2009.

Median Late Stage Pre-Money Valuations ($M)

Many of the key factors driving this trend over the past several years remain in place today:

350

Companies have delayed IPOs and are staying private longer, giving private investors more opportunity to invest and participate in the steep portion of companies’ value creation curves. A new generation of technology companies, born out of advances in cloud and mobile computing, is disrupting new industries – naturally attracting investors.

Some investors have behaved aggressively out of fear of missing out on the high-performing companies.

A record amount of late stage capital was invested over the past several years.

300 250 200 150 100 50 0 2000 01 02 03 04 05 06 07 08 09 10

11

12

13

14

15

16

17 2018

Pitchbook as of December 31, 2018.

According to CB Insights, there were 53 U.S. venture-backed companies that reached billion-dollar valuations in 2018 – a record number of new unicorns during any given year. This brought the year-end total to 140 venture-backed companies valued at $1 billion or greater, which together accounted for $526 billion in value, the highest aggregate unicorn valuation on record.

2019 State of Ve nture Cap ital | 18


T R E N D : 5G C O U L D C H A N G E E V E R Y T H I N G

better data transfer rates for limited image sharing, web browsing, and GPS

2G

3G

faster/deep web functionality for smartphones

5G could mark the beginning of the next Industrial Revolution

What will be the impact of 5G?

• • • •

4th – 5G 3rd – personal computer/internet 2nd – electricity 1st – steam engine

• • •

Industries Impacted by 5G Include

Agriculture

Autonomous Vehicles

Construction

• •

Education & Research

5G is the fifth generation of cellular mobile communications/wireless

5G

new features like SMS/ voicemail

4G

first analog cell phones and creation of mobile calling

1G

5G may enable the next enormous transformation in our society. With 5G wireless technology being introduced globally in select markets, it is not too early to contemplate the innovation that will accompany the shift, as well as its impact on our lives.

5G promises massive device connectivity, greatly enhanced data rates, reduced latency, better energy saving, and significant cost reduction. 5G could offer connectivity 100x faster and 5x more reliably than 4G. With superior connectivity also comes heightened concerns around cybersecurity and privacy. Deployment of 5G could necessitate a complete overhaul of infrastructure and the release of new devices and chipsets. The shift to 5G will lead to GDP growth, job creation, and job evolution. Use cases are pervasive and numerous industries will be impacted.

Healthcare Delivery

IoT & Smart Cities

Media & AR/VR

Transportation & Drones

2019 State of Ve nture Cap ital | 19


Exits & Returns

IPO market showed promise After a highly anticipated 2017 IPO season that fell short of expectations, 2018 brought a meaningful improvement with 85 venture-backed companies that went public, 47% more than 2017. The median market capitalization rose to $348 million, the highest median over the last 17 years.


Exits & Returns

IPO market showed promise The aggregate exit value of 2018 IPOs was the highest since 2012 when Facebook raised $16 billion in its public listing. In 2018, biotechnology companies raised more IPO proceeds than ever, capped with a record-setting offering from Moderna Therapeutics (raised over $600 million at a valuation of $7.5 billion). Chinese listings such as Pinduoduo, which raised $1.6 billion (one of the largest IPOs of 2018), also made a mark on the U.S. IPO market.

Number & Median Market Capitalization of IPOs

In 2018, tech companies comprised roughly a quarter of all IPOs. Many brand name startups such as Anaplan, Elastic, Pluralsight, and Zscaler performed exceptionally well in the months following issuance, continuing a trend of strong IPOs in the enterprise/SaaS sector. Shares of each of these companies traded up more than 50% between IPO and year end. Other notable companies such as Dropbox (the largest venture-backed IPO of the year), DocuSign, Spotify, Upwork, and Zuora, also went public in 2018, with Spotify opting to do so via a non-traditional direct listing. However, shares traded flat as a cohort in the time since their debuts. Startups may soon have a stock exchange designed specifically for them to help them avoid short-term targets associated with traditional stock exchanges. This could act as an alternative to taking private capital from investors such as SoftBank. The Long-Term Stock Exchange, backed by luminaries such as Peter Thiel and Marc Andreessen, is progressing through regulatory approvals and could be ready for business in late 2019 or 2020.

No. VC-backed IPOs

Median Market Cap ($M)

225

500

200

450

175

400 350

150

300

125

250

100

200

75

150

50

100

25

50

0

0 2000 01 02 03 04 05 06 07 08 09 10

11

12 13 14 15

16

17 2018

Pitchbook as of December 31, 2018.

2018 was one of the best years we’ve seen for M&A and IPO activity…and healthy for the ecosystem – there was strength in exits across consumer and enterprise companies. - Rich Wong, Accel

2019 State of Ve nture Cap ital | 21


Exits & Returns

M&A values rose as volume declined 2018 had several marquee M&A transactions, headlined by Walmart’s acquisition of a majority stake in Indian e-commerce powerhouse Flipkart that valued the company at $22 billion. In the U.S., Microsoft made waves with it’s $7.5 billion acquisition of code repository and developer community GitHub. This acquisition was the venture industry’s fourth-largest M&A deal on record, and the largest since the Internet bubble. SAP acquired experiencemanagement company Qualtrics for $8 billion, and Cisco acquired Duo Security for $2.4 billion to round out the year’s largest deals.

779 venture-backed companies were acquired in 2018, a 9% decrease from 2017. Yet the average acquisition value for venture-backed companies climbed 25% to $100 million.

Other notable M&A transactions included business planning software Adaptive Insights (Workday), online advertising exchange AppNexus (AT&T), cybersecurity provider Cylance (Blackberry), online jobs and career platform Glassdoor (Recruit), full-service pharmacy PillPack (Amazon), and home security company SimpliSafe (Hellman & Friedman). Generally, these blockbuster acquisitions occurred at substantially higher revenue multiples than in the past with several occurring mere days before planned IPOs.

Number & Average Acquisition Value of M&A Transactions

Of note is the increased overlap between venture-backed companies and private equity takeovers. Today, private equity firms can provide a solid and increasingly common exit route. Private equity firms are investing in a broad array of technology companies including unicorns, but also early and mid stage companies that would have been unable to secure interest from firms a few years ago. The rise of buyouts within the tech sector presents a viable exit option for founders, given the stark reality that only a small fraction of startups (~3%, per Pitchbook) ultimately go on to IPO.

No. M&A Transactions

Avg. Acquisition Value ($M)

1,000

150 125

800

100

600

75 400

50

200

25

0 2000 01 02 03 04 05 06 07 08 09 10 11

0 12

13

14

15

16 17 2018

Pitchbook as of December 31, 2018.

2019 State of Ve nture Cap ital | 22


Exits & Returns

Performance remained strong

The venture-backed exit market finished strong from a value perspective, surpassing $120 billion for the first time since 2012. The increase in exit value and flat exit count translated into higher average exit sizes – a healthy sign LPs can expect substantial distributions back in the near-term. - Pitchbook-NVCA Venture Monitor

Low absolute returns around the turn of the millennium were driven by an overcapitalized venture industry, and a dampened exit environment during and following the financial crisis in 2008. The venture industry has consolidated meaningfully when measured by the number of active venture firms. This consolidation, combined with an expanded opportunity set and bull market over the last ten years, has contributed to much improved returns. In 2018, top quartile net IRRs for vintage years since 2009 generally trended higher compared to 2017 and remained at or above 20% in most vintages, according to Cambridge Associates. Notably, 2013 through 2015 vintages saw large increases in IRR between December 2017 and December 2018, boosted by high-value late stage financings and a reinvigorated exit environment that led to substantial realized and unrealized mark-ups.

Upper Quartile Vintage Year IRRs Date of Inception through 2017

Date of Inception through 2018

30% 25% 20% 15% 10% 5% 0%

2000 01

02

03

04

05

06

07

08 09

10

11

12

13

14 2015

Cambridge Associates as of December 31, 2018.

2019 State of Ve nture Cap ital | 23


Conclusion

What lies ahead? 2019 appears to be following the same pattern as the previous two years with considerable fundraising and investing momentum showing no signs of slowing down. The biggest storyline of 2019, however, will likely be venture-backed exits and the IPOs of several of the most valuable startups in the world.


Conclusion

Expectations for 2019 & beyond technology IPOs, suggesting that this year and next could be Limited partner appetite for venture capital as an asset class viewed historically as a blockbuster era for the industry. remains strong and continues to support a healthy fundraising Some of these IPOs will spawn a wave of new investment environment for best-in-class managers. Institutional investors are opportunities as talented operators leave to pursue their own fervently committing capital to private market funds due primarily startups, contributing to a growing opportunity set for venture to the prolonged bull market in public equities and resulting investors. The rise of technology is no longer surprising news. reverse denominator effect. Given the available capital (as well as Nearly one-third of the S&P is now made up of the exciting opportunity set), 2019 is poised to technology companies. surpass 2018 in terms of capital invested. The trend of fewer, but often mega, financings is As technology’s influence expands – blurring sustaining elevated investment activity in 2019, the lines between what defines a technology as an abundance of late stage capital looks 7 OF THE TOP 10 LARGEST COMPANIES company versus a retail, transportation, or to finance large growth rounds. Given these (BY MARKET CAP) healthcare company – the opportunity set dynamics, valuations will likely remain historically ARE TECH COMPANIES expands as well. There are large paradigm shifts high. underway, particularly in artificial intelligence and blockchain technology, that will continue to drive innovation for decades. However, these trends may be eclipsed by the many noteworthy IPOs in the pipeline. Although the highly-anticipated IPOs of When considering the months and years ahead, there are reasons Uber and Lyft have not performed as well as expected, strong for both enthusiasm and mindfulness – trade tensions, market IPOs by team collaboration platform Slack, communications volatility, and government regulation could negatively impact the software provider Zoom, meat substitute producer Beyond Meat, industry, particularly the exit environment. The venture ecosystem cybersecurity firm CrowdStrike, and infrastructure management has never been more fully capitalized than it is right now – which platform PagerDuty are paving the way for the slew of companies could be harmful over the long-term, but which currently is that remain in the IPO pipeline, including Airbnb, Peloton, enabling investors to fund exciting innovation and global growth at Postmates, and Robinhood. 2019 has already proven to be a record scale. year in terms of the aggregate valuation of U.S. venture-backed

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It’s easy to get caught in the simple trap of ‘we’ve returned to 1999 levels.’ So here’s a reminder of why 2019 is 10000x better...We are all now online and at significantly greater speeds with computers in our pockets that are one-click from purchasing anything and recommending the best products to everybody we know through social networks. As a result the best companies grow faster than any time in human history. And this is about to grow even faster. - Mark Suster, Upfront Ventures

2019 State of Ve nture Cap ital | 25


Conclusion

Resources A note about the data referenced throughout this report: We acknowledge that there are numerous sources of industry data that may differ materially in methodology, breadth, and statistics. We regularly review these sources and, over time, may change the sources we cite. In this year’s report, we primarily reference Pitchbook for investing, valuation, and exit activity, and Dow Jones LP Source for venture capital fundraising data. Readers will notice that venture capital investing actually exceeds fundraising for most years; the reason is that investment data includes activities by corporate, government, and other entities, while fundraising data enables analysis of purely institutional venture capital fundraising. True capital invested by institutional venture capital firms is likely lower than the statistics referenced in these analyses, but we believe the data to be directionally accurate. In addition, the data we present has not been adjusted for inflation, so many of the comparisons made between 2018 and 2000 data are even more pronounced.

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Conclusion

About TrueBridge Capital Partners Established in 2007, TrueBridge Capital Partners is an alternative asset management firm focused on generating superior returns in the venture capital industry. TrueBridge identifies and invests in high-performing, access-constrained venture capital opportunities that generate premium value for its partners. TrueBridge prides itself on a data-driven approach to investing in both venture funds and venture-backed companies. In addition to extensive due diligence processes, the firm regularly gathers, analyzes, and publishes information about the venture industry and trends at truebridgecapital.com/insights. The firm is recognized for its longstanding partnership with Forbes to produce The Midas List, an annual ranking of technology’s top investors, The Midas List Europe, and The Next Billion Dollar Startups List. The State of the Venture Capital Industry is an annual market analysis of key venture capital industry trends spanning fundraising, investments, valuations, exits, and returns. Follow @TrueBridgeCP for the latest updates and insights.

Investment Team Contacts Edwin Poston General Partner

Mel Williams General Partner

Rob Mazzoni Principal

Andrew Winslow Vice President

Mindy Isenstein Vice President

eposton@truebridgecapital.com

mwilliams@truebridgecapital.com

rmazzoni@truebridgecapital.com

awinslow@truebridgecapital.com

misenstein@truebridgecapital.com

Kate Simpson Vice President

Brent Westbrook Senior Analyst

Divya Dhulipala Analyst

Kris Martin Analyst

Caleb Ollech Analyst

ksimpson@truebridgecapital.com

bwestbrook@truebridgecapital.com

ddhulipala@truebridgecapital.com

kmartin@truebridgecapital.com

collech@truebridgecapital.com

2019 State of Ve nture Cap ital | 27


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State of Venture Capital - 2019