svb state of the markets report q1 2017

State of theMarkets 2017Inside views on the health and productivity of the innovation economy

Written by SVB Analytics:

Steve Allan, CFAHead of Analytics

Sean LawsonManager

Steven KakowskiAssociate

Steven PippAssociate

Visit svb.comFollow @SVB_FinancialEngage #SVBSOTM

State of the Markets: First Quarter 2017

State of the Markets 2

What does 2017 hold for the Innovation Economy? To find out, my team took arear-view approach, identifying the factors that mattered most in 2016 andexamining which trends and themes will impact 2017.

For starters, it’s clear that the equity rounds that defined 2015 — privateinvestments led by crossover mutual and hedge funds, often exceeding $100M —turned out to be an anomaly. As a result, the 2016 pace of new venture-backedcompanies reaching $1B+ valuations slowed to just one-third the velocity of 2015.In contrast, the VC ecosystem showed resilience in 2016: venture funds raised$42B, their highest total in over a decade.

Looking forward, the exuberance of 2015 may yet be realized in 2017. With a class ofinternationally known unicorns (led by Snap, Airbnb and Uber) approaching IPOreadiness, the public market presents opportunities for intriguing and lucrative exits.

Steve Allan, CFAHead of SVB Analytics

State of the Markets: First Quarter 2017


1 Market Dynamics

2 Recalibrated Venture Landscape

3 Primed Exit Conditions

4 Closing Thoughts


Market Dynamics

Yields Rebound Sharply in Q4 2016


WGBI Country Yields: 12/31/16 10-Year Bond Yields of G-7 Nations: 2015–2016

Country 1 2 5 7 10 15 30SwitzerlandGermanyJapanNetherlandsDenmarkSwedenFranceSpainItalyUnited KingdomUnited StatesAustraliaNorwayCanada

+ Flipped Positive

Years to Maturity

Sovereign bonds rebounded sharply into positive-yielding territory following the U.S. presidential election, elevating expectations of rising inflationary pressure and higher interest rates under the new administration.

Negative

Sources: S&P Capital IQ and Citi Research.

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16 Q3'16 Q4'16

United States FranceItaly GermanyCanada JapanUnited Kingdom

Tech Equities Enter New Macro Environment


Nasdaq Composite Index: 2009–2016

The bull market sprint for U.S. equities has withstood global macroeconomic headwinds and geopolitical uncertainty since early 2014, reaching all-time highs in Q4 2016 following the U.S. election.

0

1000

2000

3000

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2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

• Quantitative Easing

• Recovery Post Financial Crisis

• Low Volatility

• Strong U.S. Dollar

• Growth Concerns

• Chinese Market / Currency Shocks

• U.S. Investment Incentives

• Business-Friendly Environment

• Geopolitical Conflict

• Reduced Trade and/or Immigration

• Rising Rates

Source: S&P Capital IQ.

Defining Q4: Post-Election Shakeout

7

-20% -10% 0% 10% 20% 30% 40%

Mexican Peso

Gold

Clean Energy

Emerging Markets

Information Technology

WTI Crude Oil

Iron & Steel

Banks

Bitcoin

Various market indicators reflect uncertainty surrounding the economic impact of an unexpected administration. Early movements suggest a retreat from emerging markets and expectations of increased infrastructure spending.

1. Based on indexes tracked by Dow Jones, S&P and MSCI.2. In U.S. Dollars.Sources: S&P Capital IQ and CoinDesk.

2050

2100

2150

2200

2250

2300

Sep 16 Oct 16 Nov 16 Dec 16

S&P 500 Index: Sep 2016–Dec 2016

U.S. Election:2139

+5%

Market Movements: 11/7/16–12/31/16

State of the Markets

Information Tech.1 +2%

1

1

1

1

2

2

2

2


RecalibratedVenture Landscape

0

5

10

15

20

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30IPOs

Private IPOs

Large Private Rounds Fall Out of Favor in 2016

State of the Markets 9Sources: CB Insights and S&P Capital IQ.

IPO and PIPO Transactions for U.S. Technology Firms: 2013–2016

From 2013–2015, many late-stage companies opted to raise private capital rather than enter the public markets. There were four times as many Private IPOs (rounds of $100M+) as IPOs in 2015.However, that trend reversed in 2H 2016. As crossovers pulled back and IPO conditions improved, tech IPOs exceeded the number of PIPOs.

Tech IPO Boom

Tech PIPO Boom

4

11

5

27

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2013 2014 2015 2016

Crossovers Curtail Private Funding

State of the Markets 10Source: CB Insights.

Global Investments in Venture Rounds by Notable Crossover Investors: 2012–2016

Tota

l rou

nds

Average round size

$35M$46M

$139M$153M

$109M

$0M

$20M

$40M

$60M

$80M

$100M

$120M

$140M

$160M

$180M

0

10

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30

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60

2012 2013 2014 2015 2016

Tiger Global Management Goldman Sachs Wellington Management

Fidelity Investments Coatue Management T. Rowe Price

BlackRock Average round size

Some of the largest fund managers who took a primary role in financing large, late-stage private rounds were less active in 2016. The average round size remained above $100M, more than double that of 2013.

Traditional Investors Replenish Capital


While crossovers have drastically cut back on venture investments, the ecosystem as a whole has shown resilience. In 2016, venture capital commitments hit their highest level in more than a decade.

1. Corporate venture capital.2. Crossovers include hedge funds, mutual funds, and wealth management firms.Sources: Pitchbook, National Venture Capital Association, and SVBA estimates.

$0B

$10B

$20B

$30B

$40B

$50B

$60B

$70B

$80B

$90B

2 007 2 008 2 009 2 01 0 2 01 1 2 01 2 2 01 3 2 01 4 2 01 5 2 01 6

VC Fundraising VC Investments CVC Investments Crossover Investments

U.S. Venture Capital Investments and Fundraising: 2007–2016

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Crossover Investment- 50% YoY

Venture CapitalFundraising + 18% YoY

1 2

Time to Exit — Before and After IPO

State of the Markets 12Sources: Dr. Jay Ritter, University of Florida; Wall Street Journal; Crunchbase and S&P Capital IQ.

Access to funding from traditional and nontraditional sources allowed tech companies to delay the scrutiny and transparency of public markets. Even after an IPO, it may take years to unwind positions.

0

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1999 2003 2007 2011 2015

Years from Founding to IPO for U.S. Tech:1999–2016 (Median)

U.S. Unicorns

Post-2000 Dotcom Crash

Post-2008 Financial Crisis

90

10

Median

25

75

Deciles

Share Float Trajectory for U.S. Tech: Float % by IPO Year (Median)

0%

25%

50%

75%

100%2012 2013

2014 2015

2016

Closely Held

IPOs

IPOs

IPOs

IPOsIPOs

At IPO +6 mos.

+12mos.

+18mos.

+24mos.

+36mos.

+48mos.

Net Change in Global Unicorns by Year: 2014–2016

Unicorn Exits Stabilize with New Entrants


TotalMarket Values2

All Unicorns$599B

1. Exits include IPOs, M&A and revaluations below $1B. 2. As of 12/31/16.3. Sum of market caps for unicorns at the close of their respective first day of trading.Sources: Wall Street Journal and S&P Capital IQ.

Apple$618B

Google$539BFacebook$332B

Unicorns at IPO3

$96B

The number of new companies reaching $1B+ valuations still exceeded the number of exits,1 but the ratio steadied in 2016. However, the current backlog of unicorns — with a combined market value of nearly $600B — could take years to be absorbed by the public market.

0

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-11

+76

-15

+49

154144

79

45

-14 +24

Year-end Unicorns

2013

Exits Entrants Year-end Unicorns

2015

Year-end Unicorns

2014

Exits Entrants Exits Entrants Year-end Unicorns

2016

Ratio: 3.3x Ratio: 6.9x Ratio: 1.7x

Introducing SVB’s Interactive Unicorn Navigator


Use our Unicorn Navigator to explore the connections between the preceding concepts and follow the journeys of the billion-dollar club as they traverse the venture landscape toward an eventual exit.

Sources: Wall Street Journal, Pitchbook and S&P Capital IQ.

• Three-quarters of unicorns that have gone public since 2014 raised from a crossover investor, compared to one third of those that have been acquired.

• Only 73% of the 2016 unicorn class raised a PIPO, compared to 84% of 2014 and 2015 classes.

• Just 36% of the 2016 unicorn class raised from a crossover.

• Nearly 90% of unicorns with a crossover raised a $100M+ round.

• 81% of unicorns remain privately held, including all 22 unicorns in the 2016 class.https://www.svb.com/state-of-the-markets-report/

https://www.svb.com/state-of-the-markets-report/


PrimedExit Conditions

Public M&As Restore Valuation Confidence

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x


Notes:NTM Revenue Multiples for IPOs based on earliest estimates, adjusted to IPO date.Multiples above 10x at IPO are represented with an arrow.Sources: S&P Capital IQ and Bessemer Venture Partners.

TEAM: 12x

Restored Confidence

“Good Times” 6-Month Gap Between IPOs

When valuations for cloud software companies plummeted in early 2016, acquirers jumped at the opportunity to buy at discounted valuations. This activity allowed for a second wave of IPOs in late 2016 by restoring investor confidence in high-growth software valuations.

NTM Revenue Multiples: 2015–2016

TWLO: 14x SHOP: 14x

Q2/Q3 Cloud M&A

BOX

APPT

INST

XTLY

Cloud IPOs

BVP Cloud IndexConstituent Median

DWRE

LNKD

N

OPWR

Jan ’15 April ’15 July ’15 Oct ’15 Jan ’16 April ’16 July ’16 Oct ’16

As Exit Conditions Improve, IPO Window Opens

State of the Markets 17Sources: S&P Capital IQ and Yahoo! Finance.

Companies look for a sustained period of low volatility before going public. Twelve tech IPO candidates took advantage of a calm period between late summer 2016 and the November election.

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Jan '12 Jul '12 Jan '13 Jul '13 Jan '14 Jul '14 Jan '15 Jul '15 Jan '16 Jul '16

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1H '12 2H '12 1H '13 2H '13 1H '14 2H '14 1H '15 2H '15 1H '16 2H '16

U.S. Tech IPO Count: 2012–2016

^VIX: 2012–2016

2016 Election

VIX of 20+: 4 Days VIX of 20+: 75 Days

Public Unicorns Grow into Their Private Values


-400%

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-100%

0%

100%

200%

300%

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500%

600%

1. As of 12/31/16. Of the three U.S.-listed companies, only Twilio has passed its six-month lock-up period.2. Ucar listed on NEEQ; valuation as of IPO in July 2016.Sources: Wall Street Journal and S&P Capital IQ.

Total Returns as of Year-End 2016 Compared to Tech Unicorns’ Last Private Round

0%

-20%

-40%

-60%

-80%

IPO Date: 201420152016

Companies look to the performance of their peers as an indication of market reception. The unicorns are evenly divided between those trading above and those trading below their last private valuations.

Half Above Half Below

2016 Unicorn IPOs All Trade Above

Last Private Valuation1

Wave of M&A Leaves Cash-Flush Investors


1. Based on U.S. software M&A proceeds to public investment managers.2. Based on first-day closing price.Sources: S&P Capital IQ and Renaissance Capital.

Cash Returned to Public Investment Managers1

vs. Gross Public Offerings (Cumulative)

8.6%11.8%

37.0%

0%

10%

20%

30%

40%

Total Returns: 2016

From Q2 2015 to Q4 2016, capital returned to public investment managers (i.e., capital that must be reinvested) from software M&A in the U.S. reached $63 billion while IPOs and follow-on offerings only hit $5 billion. This dynamic has left investors flush with cash and seeking reinvestment opportunities.

$10B

$15B

$23B $24B

$32B

$59B$63B

$1.3B $2.0B $2.7B $2.8B $3.5B $4.4B $5.0B

$0

$10

$20

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Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 Q4 '16

Closed M&A Announced M&A IPO and Follow On Offerings

$58B

Gap

S&P 500 Software & Services

S&P 500 Median U.S. Tech IPO Pop2

Q3

Crowded Field of $1B+ IPO Candidates


U.S. Tech IPOs with Market Caps >$1B, Sized by First Day Market Cap or Last Private Valuation: 2012–2016

Sources: S&P Capital IQ and Wall Street Journal.

In the last five years, only three U.S. tech companies went public at valuations greater than $10 billion; now seven more have attained that valuation through private financing, with another 77 above $1 billion.

2017 and Beyond2012 2013 2014 2015 2016

Q1

Q4 x10x31

x33


Closing Thoughts

Tech Drives Overall Economic Growth


Since the hype and collapse the dot-com era, technology has steadily increased in importance (and value) for the U.S. economy. Technology companies in the S&P 500 index now make up nearly one-quarter of the entire index value, the largest of any sector.

Source: Siblis Research.

S&P 500 Technology Sector1 Weighting: 1995 - 2016

2016

2011

2006

2001

Tech Other

1. Amazon.com has been included in Technology.

0%

5%

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15%

20%

25%

30%

35%

1995 1998 2001 2004 2007 2010 2013 2016

Technology Trigger

Peak of Inflated

Expectations

Trough of Disillusionment

Slope of Enlightenment

23%

Largest S&P 500 Companies by Market Cap: 2001–2016

The Year Ahead — Predicting 2017


Many of the themes from 2016 provide insight into what 2017 holds for the venture ecosystem. But the risk remains: Unexpected world, political or economic events could shock the innovation ecosystem.

Themes PredictionsValuations in 2016 saw a healthy recalibration

after the high-flying years of 2014 and 2015. ValuationsWith plenty of capital in VC war chests, valuations remain stable across early stages but fall in later stages without crossover participation.

2016 was the slowest year for tech IPOs since the financial crisis as a result of valuation declines

and an increase in volatility early in the year.IPOs

With public company valuation confidence restored and a stable of maturing unicorns, 2017 sees 2–3 times the number of IPOs as 2016.

Many of the mega-deals of 2016 were of public companies hit by valuation drops. This was also a

banner year for tech M&A by non-tech acquirers.M&A

Tech giants’ spending spree reaches the VC-backed ecosystem but with mixed success compared to the most recent private valuation.

Venture firms raised their highest total commitments in over a decade — $41.6B. Fundraising With full coffers, fundraising in 2017 falls from

the 2016 high, but interest from LPs stays high.

The sharp pullback in 2016 (down 50% from 2015 levels) was a return to normal. Crossovers

With rates rising, asset managers look for growth elsewhere. This helps deflate the overheated market for late-stage capital.

Report Authors


Steven PippAssociate, SVB [email protected]

Steve Allan, CFAHead of SVB [email protected]

Sean LawsonManager, SVB [email protected]

Steven KakowskiAssociate, SVB [email protected]

Steve Allan, CFA is the Head of SVB Analytics and SVB Securities Strategic Advisory, responsible for the three areas of information services provided to the innovation economy, Strategic Advisory Services, Compliance Valuations, and Insights. Strategic Advisory Services provides consultative guidance around valuations, benchmarking and inorganic growth strategies.

Sean Lawson is a Manager with SVB Analytics and SVB Securities, responsible for leading research and insights spanning early and growth stage venture-backed technology companies.

Steven Kakowski is an Associate with SVB Analytics, responsible for valuation engagements for venture-backed technology companies.

Steven Pipp is an Associate with SVB Analytics and SVB Securities, responsible for valuation and strategic advisory engagements for venture-backed technology companies.

About Silicon Valley BankFor more than 30 years, Silicon Valley Bank has helped innovative companies and their investors move bold ideas forward, fast. SVB provides targeted financial services and expertise through its offices in innovation centers around the world. With commercial, international and private banking services, SVB helps address the unique needs of innovators.


This material, including without limitation to the statistical information herein, is provided for informational purposes only. The material is based in part on information from third-party sources that we believe to be reliable, but which have not been independently verified by us and for this reason we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. SVB Analytics is a member of SVB Financial Group and a non-bank affiliate of Silicon Valley Bank. Products and services offered by SVB Analytics are not FDIC insured and are not deposits or other obligations of Silicon Valley Bank. SVB Analytics does not provide investment, tax, or legal advice. Please consult your investment, tax, or legal advisors for such guidance.©2017 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve System. SVB>, SVB Financial Group, and Silicon Valley Bank are registered trademarks. CompID – 256

About SVB AnalyticsSVB Analytics, a non-bank affiliate of Silicon Valley Bank, serves the strategic business needs of entrepreneurs, corporates and investors in the global innovation economy. For more than a decade, SVB Analytics has helped global business leaders make informed decisions by providing market intelligence, research, and consulting services. Powered by proprietary data, SVB Analytics has a unique view into the technology and life science sectors.

svb state of the markets report q1 2017

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