The Changing Structure of the Venture Capital Industry

Investor Relations

mark-suster
  • THE SHIFTING VC LANDSCAPE Mark Suster - @msuster
  • 2 To read my full blog post about this presentation and watch the video see links in description below.
  • 2014 appears to be the most active for LPs the since recession Source: 2Q 2014 Pitchbook US Venture Industry Datasheet . Annualized 2014 fundraising based on 49 funds closed in Q1. PwC “Asset Management 2020” 3 $ 23 .1 $ 34 .6 $ 36 .0 $ 29 .5 $ 12 .6 $ 19 .5 $ 24 .7 $ 20 .3 $ 18 .4 $ 8. 8 159 183 164 171 102 121 97 132 147 ~200 0 50 100 150 200 250 $- $5 $10 $15 $20 $25 $30 $35 $40 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Est Capital Raised ($B) # of Funds Closed Q1
  • The Dot Com skepticism from LPs has finally thawed, but some things have changed…
  • Seed funds now a well accepted norm (67% of all funds). Starting to hear talk of “seed co- investment or opportunity funds” *As of Q1 2014. Source; Q2 2014 PitchBook US Venture Industry Data Sheet 5 33% 40% 54% 67% 2008 2010 2012 2014* Share of VC funds raised < $50M Represents 6% of total $ raised
  • But overall LP capital has continued to concentrated in later-stage funds with 66% of all money in big funds *As of Q1 2014. Source; Q2 2014 PitchBook US Venture Industry Data Sheet 6 39% 43% 59% 66% 2008 2010 2012 2014* Share of VC $ funds raised > $500M
  • Traditional VC is what has been impacted the most decreased in dollars and funds *As of Q1 2014. Source; Q2 2014 PitchBook US Venture Industry Data Sheet, Atelier Advisors 7 44% 33% 23% 18% 2008 2010 2012 2014* # of Funds (%) $100M - $500M 53% 45% 32% 26% 2008 2010 2012 2014* $ Funds Raised (%) $100M - $500M
  • Some obvious factors driving later stage LP investment 8 q  Pension funds & other large asset managers need to write big checks q  FoFs need to show they have access to the top historical winners q  Continued perception / narrative of “the best and the rest” But this is too simplistic
  • 9 The market is actually bifurcating
  • The structure of the startup / venture market has started to change 10 1.  Startups staying private longer prior to IPO 2.  More value captured by private investors 3.  VC funds thus raising more growth & opportunity funds to back pro-rata in winners
  • Companies are raising larger amounts of capital before going public Source: Dow Jones Venture Source 2014 via EY 11 $49 $43 $72 $83 $78 $101 2008 2009 2010 2011 2012 2013 Median amount raised prior to IPO ($M)
  • •  Hedge funds •  Mutual funds Capital sources for late-stage private companies up dramatically Source: CB Insights 12 Traditional public investors •  Growth funds •  Opportunity funds Traditional VC investors Moving Later Moving Earlier •  Google •  Rakuten •  Alibaba Corporate VC Entrants New
  • IPOs are happening, they’re just being delayed Source: NVCA 2014 Yearbook - Thomson Reuters 13 2 2 2 1 2 3 21 17 9 13 2008 2009 2010 2011 2012 2013 No. of IPOs with market cap > $1B No. of IPOs with market cap > $10B
  • $0.2 $0.4 $0.8 $4.3 $18 $104 $150+ Cisco Amazon Microsoft LinkedIn Twitter FB Alibaba (est) Market Capitalization at IPO ($B) So private investors capture more value, encouraging greater pre-IPO funding. Early investors want to capture pro-rata Source: Quigley Report 2011, FLAG Capital 14 Previous Tech Cycle New Tech Cycle $125B+ Current market cap: $150B+ $340B+
  • But this is not 2000. 15 This is not 2000
  • The Kauffman Report was wrong. It’s morning in VC Sources: U.S. Bureau of the Census, World Bank. As of Q2 June 2012. Akamai. 2014 Statista forecasts, : eMarketer, WSJ 16 50x more internet users: 2.4B in 2012, 44M in 1995 120x faster online speeds: 6.7 mbps US average today vs. 56k modems People are mobile: Personal, location aware. US has 164M smartphone users & 119M tablet users in 2014. People are socially connected: 1.3B+ MAU on FB, 250M+ on TWTR, 300M+ on LNKD. Credit cards on file: 1B+ digital shoppers and $1.5T ecommerce spend globally. $35B Apple app store in 2014
  • Public company startups are significantly more mature than their 1.0 counterparts. Source: Age from NVCA 2014 Yearbook – Thomson Retuers, Revenue & Multiples from Pitchbook Tech Valuations Presentation (June 2014) 17 3.1 7.4 IPO in '00 IPO in '13 Years to IPO (from 1st financing) $35 $102 IPO in '00-01 IPO in '13-'14 Revenue ($M) 13.3x 5.3x IPO in '00-01 IPO in '13-'14 Valuation/Revenue Multiple
  • But late-stage private financing still produces some lofty late-stage valuations When a concept works the competition is fierce Source: Graphic from Bullpen Capital 18 Seed Stage Early Stage Later Stage More seed rounds as costs decline & sources of capital increase Larger later stage rounds after validation Traditional VC Today’s VC
  • Thus late-stage valuations have risen fastest in past 4 years. That’s the trend to watch carefully Source: Source; Q2 2014 PitchBook US Venture Industry Data Sheet, * As of Q1 2014 19 $3.2 $6.7 $19.9 $37.1 $66.1 $5.9 $11.3 $28.1 $62.3 $155.0 $1 $10 $100 $1,000 17% 14% 9% 14% 24% Seed Series A Series B Series C Series D+ Median Pre-Money Valuation ($M) 2010 to 2014 CAGR 2014* 2010
  • THE SHIFTING VC LANDSCAPE Mark Suster - @msuster
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  • THE SHIFTING VC LANDSCAPE Mark Suster - @msuster
  • 2 To read my full blog post about this presentation and watch the video see links in description below.
  • 2014 appears to be the most active for LPs the since recession Source: 2Q 2014 Pitchbook US Venture Industry Datasheet . Annualized 2014 fundraising based on 49 funds closed in Q1. PwC “Asset Management 2020” 3 $ 23 .1 $ 34 .6 $ 36 .0 $ 29 .5 $ 12 .6 $ 19 .5 $ 24 .7 $ 20 .3 $ 18 .4 $ 8. 8 159 183 164 171 102 121 97 132 147 ~200 0 50 100 150 200 250 $- $5 $10 $15 $20 $25 $30 $35 $40 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Est Capital Raised ($B) # of Funds Closed Q1
  • The Dot Com skepticism from LPs has finally thawed, but some things have changed…
  • Seed funds now a well accepted norm (67% of all funds). Starting to hear talk of “seed co- investment or opportunity funds” *As of Q1 2014. Source; Q2 2014 PitchBook US Venture Industry Data Sheet 5 33% 40% 54% 67% 2008 2010 2012 2014* Share of VC funds raised < $50M Represents 6% of total $ raised
  • But overall LP capital has continued to concentrated in later-stage funds with 66% of all money in big funds *As of Q1 2014. Source; Q2 2014 PitchBook US Venture Industry Data Sheet 6 39% 43% 59% 66% 2008 2010 2012 2014* Share of VC $ funds raised > $500M
  • Traditional VC is what has been impacted the most decreased in dollars and funds *As of Q1 2014. Source; Q2 2014 PitchBook US Venture Industry Data Sheet, Atelier Advisors 7 44% 33% 23% 18% 2008 2010 2012 2014* # of Funds (%) $100M - $500M 53% 45% 32% 26% 2008 2010 2012 2014* $ Funds Raised (%) $100M - $500M
  • Some obvious factors driving later stage LP investment 8 q  Pension funds & other large asset managers need to write big checks q  FoFs need to show they have access to the top historical winners q  Continued perception / narrative of “the best and the rest” But this is too simplistic
  • 9 The market is actually bifurcating
  • The structure of the startup / venture market has started to change 10 1.  Startups staying private longer prior to IPO 2.  More value captured by private investors 3.  VC funds thus raising more growth & opportunity funds to back pro-rata in winners
  • Companies are raising larger amounts of capital before going public Source: Dow Jones Venture Source 2014 via EY 11 $49 $43 $72 $83 $78 $101 2008 2009 2010 2011 2012 2013 Median amount raised prior to IPO ($M)
  • •  Hedge funds •  Mutual funds Capital sources for late-stage private companies up dramatically Source: CB Insights 12 Traditional public investors •  Growth funds •  Opportunity funds Traditional VC investors Moving Later Moving Earlier •  Google •  Rakuten •  Alibaba Corporate VC Entrants New
  • IPOs are happening, they’re just being delayed Source: NVCA 2014 Yearbook - Thomson Reuters 13 2 2 2 1 2 3 21 17 9 13 2008 2009 2010 2011 2012 2013 No. of IPOs with market cap > $1B No. of IPOs with market cap > $10B
  • $0.2 $0.4 $0.8 $4.3 $18 $104 $150+ Cisco Amazon Microsoft LinkedIn Twitter FB Alibaba (est) Market Capitalization at IPO ($B) So private investors capture more value, encouraging greater pre-IPO funding. Early investors want to capture pro-rata Source: Quigley Report 2011, FLAG Capital 14 Previous Tech Cycle New Tech Cycle $125B+ Current market cap: $150B+ $340B+
  • But this is not 2000. 15 This is not 2000
  • The Kauffman Report was wrong. It’s morning in VC Sources: U.S. Bureau of the Census, World Bank. As of Q2 June 2012. Akamai. 2014 Statista forecasts, : eMarketer, WSJ 16 50x more internet users: 2.4B in 2012, 44M in 1995 120x faster online speeds: 6.7 mbps US average today vs. 56k modems People are mobile: Personal, location aware. US has 164M smartphone users & 119M tablet users in 2014. People are socially connected: 1.3B+ MAU on FB, 250M+ on TWTR, 300M+ on LNKD. Credit cards on file: 1B+ digital shoppers and $1.5T ecommerce spend globally. $35B Apple app store in 2014
  • Public company startups are significantly more mature than their 1.0 counterparts. Source: Age from NVCA 2014 Yearbook – Thomson Retuers, Revenue & Multiples from Pitchbook Tech Valuations Presentation (June 2014) 17 3.1 7.4 IPO in '00 IPO in '13 Years to IPO (from 1st financing) $35 $102 IPO in '00-01 IPO in '13-'14 Revenue ($M) 13.3x 5.3x IPO in '00-01 IPO in '13-'14 Valuation/Revenue Multiple
  • But late-stage private financing still produces some lofty late-stage valuations When a concept works the competition is fierce Source: Graphic from Bullpen Capital 18 Seed Stage Early Stage Later Stage More seed rounds as costs decline & sources of capital increase Larger later stage rounds after validation Traditional VC Today’s VC
  • Thus late-stage valuations have risen fastest in past 4 years. That’s the trend to watch carefully Source: Source; Q2 2014 PitchBook US Venture Industry Data Sheet, * As of Q1 2014 19 $3.2 $6.7 $19.9 $37.1 $66.1 $5.9 $11.3 $28.1 $62.3 $155.0 $1 $10 $100 $1,000 17% 14% 9% 14% 24% Seed Series A Series B Series C Series D+ Median Pre-Money Valuation ($M) 2010 to 2014 CAGR 2014* 2010
  • THE SHIFTING VC LANDSCAPE Mark Suster - @msuster
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