The views in this Venture Capital Trends report are subject to change at any time based upon market or other conditions and are current as of December 30th, 2019. While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed.
Before we look ahead to potential 2020 trends in Venture Capital, we believe it would be useful both to quickly review the "why venture capital" question discussed in an earlier article, and then to take a look back at 2019, which was certainly an interesting year for the industry!
On the "Why venture capital" angle, this is a question we have discussed in more depth and that has come up firsthand &, especially from people who are confused by some of the rich valuations we will discuss below. A few key points to note include:
Historically low correlation to equities and fixed income, offering diversification potential in the context of the investor's overall investment portfolio.
Even if individual VC investments may be volatile given the nature of the business, the overall early-stage portfolio may still be stable.
Given the high growth potential, early-stage may offer an inflation hedge, particularly in a low interest environment.
While perceived as risky, VC also has outsized growth potential that is difficult to find with larger stock or fixed income opportunities. In fact, many of the world's largest corporations such as Apple, Google (Alphabet), and Facebook derived large growth from initial VC investment.
One major trend that even someone who was not a keen observer of early stage investing, or even finance for that matter, was the IPO of several unicorns (Unicorn = early stage company with a valuation over $1 billion) that are household names, and the subsequent broad range of post-IPO results.
Actual IPOs
Lyft: On March 29, 2019, Lyft went public at an opening price of $72.00, reflecting a $22B valuation, or roughly in line with established companies like Halliburton, United Airlines, Fox, and Viacom.
Pinterest: On April 18, 2019, Pinterest went public at $19 per share for a $10B valuation, in line with Brown-Forman, Pulte, Comerica, and Aramark
Uber: Not to be outdone, Lyft's main competitor Uber went public just weeks later, On May 10, 2019, Uber went public at $45/share, valuing the company at $75B, or roughly in line with S&P 500 mainstays Mondelez (spinoff from Kraft), Caterpillar, Goldman Sachs, and Sony.
Beyond Meat: Another unicorn came via Beyond Meat, whose May 4th IPO priced at $25/share, started trading at $46/share, and hit an intraday peak of $73/share. This was one of the biggest one-day gains in history, reflecting a valuation of $1.5B at the initial pricing to a peak of $3.8B
Slack: On June 20, 2019, Slack went public at $38.50 per share for a $23B valuation (similar to Lyft above). Of note, Slack's IPO was conducted via a direct listing, meaning the company did not raise money via issuing new shares, but rather by selling shares held by existing shareholders
Delayed IPOs
AirBNB: AirBNB delayed its expected 2019 IPO until 2020, but already has a valuation over $31B with $4.4B in funding raised, or roughly that of Tyson Foods, Constellation Brands, Travelers, and Occidental Petroleum
WeWork: On the other side of the coin, no pun intended, WeWork announced its plans to go public on August 14, but announced in September that it would withdraw its S-1 IPO filing. At a $47B valuation by its largest investor, this would have been in line with Kinder Morgan, Kimberley Clark, Met Life, and Marriott; however, said investor has since marked its investment down to under $5B and in fact provided WeWork with a capital infusion necessary to survive
Why do we put so much emphasis on these companies? Given that a large portion of economic innovation may come from companies that were once early-stage, these investments should in turn drive investor returns, especially when we consider major success stories like Apple, Google, and Facebook. However, the recent unicorns have not fared well as public companies so far, even when we back out WeWork's withdrawn IPO and 90% write-down, thus creating a major potential concern if valuations are unrealistic.
Beyond Meat: BM has been the one success story, with an IPO priced at $25 that opened at $46 and is now $77. Even as one of the rare companies to do well post-IPO, the current price level is still a major pullback from highs near $240.
Lyft: IPO at $72, and currently trading at $45.
Uber: IPO at $45, and currently at $30 after dropping to as low as $25.
Pinterest: IPO at $19, and currently essentially flat at $18.50 after growing to nearly $37.
Slack: IPO at $38.50, currently trading just over $21.
We should also note that even Facebook had a very rough initial post-IPO period before rebounding, and any one of the companies above may end up being a long-term success story, but the examples above are still very concerning given the high amount of market capitalization wiped out. A full analysis of the reasons for the lofty valuations is well beyond the scope of our discussion here, but a few explanations I have come across from respected sources include:
Surplus of capital: With venture capital moving from a niche investment sector into one that is commonplace, many large and institutional investors have flooded the market with capital. Unlike Buffett at Berkshire, who is able to be patient and wait for a deal that fits all of his criteria given his industry stature and the according deference/patience, many VC managers may feel pressure to put money to work.
Fear of missing out: Similarly, even at lofty valuations, growth companies may offer the potential for 2-3x returns that are hard to find in larger publicly traded companies, leading investors to accept valuation metrics that they would normally be wary of
Familiarity: On the retail (non-institutional) market, many investors are likely far more familiar with the household names above than the more niche, tech-focused names from the early years of venture capital, creating strong public demand
With that said, we remain very bullish on the VC sector as a whole*, and one firm the author is involved with focuses on the earlier stage of the market where attractive (albeit certainly carrying risk) valuations can be found. IPO's are also not the only way for investors to have lucrative exits, and many successful startups that stay out of the public eye may end up being bought in an M&A transaction for very high returns without having to risk the public market volatility. There are also many areas that we saw emerging in 2019 such as Big Data, FinTech, MedTech that are still in the nascent stages, and which have the potential to disrupt long-incumbent industries. Related, we strongly believe that this sector will be a major driving force for innovation and economic growth, while also offering excellent growth potential and diversification benefits. Further, many of the innovations in the early-stage market are those that can have a major positive impact on society, whether medical innovations, clean technologies, or access to information, with many of these areas already showing strong initial traction. We will examine a few of these specific industries in more detail in upcoming pieces, and always welcome any further comments or insights.
*Please note that this is not meant to be construed as any sort of investment advice nor offer to buy/sell securities in any way.
Sources
For excellent high-level analysis for people interested in learning more about venture capital, I strongly recommend Leonard Batterson and Ken Freeman's “Building Wealth Through Venture Capital”.
Yahoo Finance for broad data; others: