The second quarter of 2018 was the fifth quarter in a row with over 10 venture-backed IPOs. While this is great news, it is still fairly insignificant when compared to the number of private venture-backed companies valued at over $1 billion. In the first half of 2018, there were 42 new private companies valued at over $1 billion and 94 financings of $100 million or more. The amount of capital available in the private markets continues to push companies to stay private longer and removes the need to raise capital from the public markets.
There are no signs of this trend letting up. 2018 is on pace to see over $30 billion raised by over 300 funds for the fifth year in a row. This includes 8 funds closed in the first half of 2018 of over $500M and does not include Sequoia’s $8B fund that is expected to close later this year. It is also rumored that Softbank’s Vision Fund is looking to raise another fund of similar size. All of this capital will need to be deployed over the next 3-5 years and will continue to fuel the growth of private companies.
Additional capital is also entering the venture eco-system via Corporate VCs. The number of deals completed annually by Corporate VCs since 2010 has nearly tripled and the total investment amount has grown 4x. This year, Corporate VCs are on pace to invest over $50 billion in private companies. This is comparable to the amount invested by growth equity firms.
Similar fundraising trends are also taking place in the private equity market. This is actually benefitting the venture eco-system as PE-backed buyouts are steadily increasing. In the first half of this year, PE buyouts are representing almost 20% of venture-backed exits. This represents a steady increase since 2008 and shows no signs of slowing down given the size of PE funds being raised. Additionally, the average size of these buyouts are increasing over the same period. This is welcomed news to venture investors.
The amount of capital available in the system combined with the increased length of time companies stay private has also generated a robust and growing secondary market. While this market is harder to quantify, it is a vehicle that many retail and non-traditional venture investors are using to access high-growth companies. Venture-backed companies are also facing increased pressure from employees who have been locked up for years with illiquid stock options or RSUs. This has resulted in an increasing number of company-led tender offers to give employees some financial breathing room. Secondaries are also becoming another method for early-stage investors to achieve an exit; whether partial of full. The highest profile of these was Softbank acquiring a large portion of Benchmark’s ownership in Uber earlier this year.
Everyone is trying to predict when the next market downturn will take place, but given the increasing amount of capital available to private companies it is questionable if even a significant public market decline would have much effect on venture-backed companies.
For more information, check out the 2018 Q2 edition of the Pitchbook Venture Monitor.