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SVB State of the Markets: Second Quarter 2017


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Four months in, 2017 is shaping up to be a year of harvesting and replanting for the innovation economy.
The SVB Analytics team examined the private-company growth propelled by the large capital raises of 2014-15
and the subsequent plunge in large investments and exits in 2016. Given the activity we’ve seen in the first
quarter of 2017, we are forecasting significant harvesting of returns resulting from the last decade of sweeping

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SVB State of the Markets: Second Quarter 2017

  1. 1. State of the Markets 2017 The Early Harvest: IPOs Spring to Life Second Quarter 2017 Written by SVB Analytics: Steve Allan, CFA Head of External Insights & Analytics Sean Lawson Senior Manager Steven Pipp Senior Associate Visit Twitter @SVB_Financial Engage #SVBSOTM
  2. 2. State of the Markets: Second Quarter 2017 State of the Markets 2 Four months in, 2017 is shaping up to be a year of harvesting and replanting for the innovation economy. The SVB Analytics team examined the private-company growth propelled by the large capital raises of 2014-15 and the subsequent plunge in large investments and exits in 2016. Given the activity we’ve seen in the first quarter of 2017, we are forecasting significant harvesting of returns resulting from the last decade of sweeping innovations. We predict many private companies will find numerous avenues open in 2017 for raising cash. For those companies with the strongest growth stories ― those who are reaching their previously frothy valuations ― the public equity market, sparingly available in 2016, is opening to new issuances. For companies still growing into their private valuations, yet in need of capital, there are exceedingly well-capitalized private equity firms seeking buyout opportunities. Further, as technology accelerates disruption of incumbent business models, we expect an increase in strategic corporate acquisitions — designed in many cases to help the corporates stay relevant in the 21st century. But 2017 isn’t only about harvesting returns. Venture capitalists, flush with cash after raising $42 billion in 2016, will have many opportunities to fund the next crop of innovative companies that are poised to drive disruption for the next decade. Steve Allan, CFA Head of External Insights & Analytics
  3. 3. State of the Markets: Second Quarter 2017 State of the Markets 3 1 Predictions: Year to Date 2 Market Dynamics 3 Decisions Ahead for Late Stage 4 The Early Harvest: IPO Conditions 5 Closing Thoughts
  4. 4. Preliminary Grades on 2017 Predictions State of the Markets 4 The themes of 2016 have provided reliable insight into what 2017 holds for the venture landscape. But risks remain: Unexpected economic or geopolitical events could shock the innovation economy. Q1 Predictions Q2 Updates With plenty of capital in VC war chests, valuations remain stable across early stages but fall in later stages without crossover participation. Valuations Early indications for 2017 point toward a plateau in valuations, as comparable capital levels flow to fewer deals. With public company valuation confidence restored and a stable of maturing unicorns, 2017 sees 2 to 3 times the number of IPOs as 2016. IPOs After a slow start to 2017 following the U.S. presidential election, IPOs have picked up steam. Bellwether Snap Inc. successfully listed in March. Tech giants’ spending spree reaches the VC-backed ecosystem but with mixed success compared to the most recent private valuation. M&A Two unicorns were acquired in Q1’17 — as many as went public. Expect future deals both explosive (AppDynamics, $3.6B) and tame (SimpliVity, <$1B). With full coffers, fundraising in 2017 falls from the 2016 high, but interest from LPs stays high. Fundraising After peak fundraising in 2016, Q1’17 saw the fewest VC funds closed since Q3’15. LPs seem to have turned their attention to private equity firms. With rates rising, asset managers look for growth elsewhere. This helps deflate the overheated market for late-stage capital. Crossovers Late-stage mega-rounds appear to be a thing of the past. The Fed raised rates again in March, and expectations are high for additional hikes. Sources: S&P Capital IQ, The Wall Street Journal, Bloomberg and PitchBook.
  5. 5. State of the Markets 5 Market Dynamics
  6. 6. Post-Election Rally Reaches New Peaks State of the Markets 6 Nasdaq Composite Index: Q2’16–Q1’17 The bull run in U.S equities showed no signs of slowing post-election, touching all-time highs even in the face of fiscal policy stumbles and geopolitical uncertainty. • U.S. investment incentives • Tax reform • Geopolitical concerns • Reduced trade and/or immigration • Rising rates Source: S&P Capital IQ. 4000 4500 5000 5500 6000 6500 7000 Post 2016 Election: +14% Year 2000 Peak April May June July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. 2016 2017
  7. 7. The Federal Reserve Tightens Monetary Policy State of the Markets 7 Fed Funds Effective Overnight Rate: Q2’07–Q1’17 Strong economic growth indicators in the United States have led the Fed to hike rates three times since October 2015, departing from a decade of dovish interest rates. The market believes there are more to come. Sources: S&P Capital IQ and Bloomberg. Probability of a Rate Hike based on Fed Funds Futures: As of 3/31/2017 13.3% 56.7% 63.0% 80.0% May June July Sept. 0% 1% 2% 3% 4% 5% 6% Three rate hikes in the last 18 months April Jan. Jan. Jan. Jan. Jan. 2007 2009 2011 2013 2015 2017
  8. 8. Rising Rates Lead to Real Capital Movement State of the Markets 8 Quarterly Volume of Corporate Leveraged-Loan Repricing: Q1’02–Q1’17 $0B $50B $100B $150B $200B $250B As the sun sets on an era of historically low rates, fund managers are once again able to find yields in debt instruments. Investors in Q1’17 clamored for floating-rate corporate loans, which perform well in rising interest rate environments, with outsized demand actually reducing the cost of borrowing for firms. This led to the highest quarterly volume of repricings in the last 15 years. Adopted from: Wirz, Matt. “U.S. Firms Slash Interest Tab in $100 Billion Refinancing Blitz.” The Wall Street Journal. Feb. 8, 2017. Data source: Leveraged Commentary and Data, an offering of S&P Global Market Intelligence.
  9. 9. State of the Markets 9 Decisions Ahead for Late Stage
  10. 10. $0B $2B $4B $6B $8B $10B $12B $14B $16B $18B $20B Froth Subsides from an Otherwise Healthy Ecosystem State of the Markets 10Source: PitchBook. Venture Capital Invested in Information Technology by Round Size: 2012–Q1’17 As crossover investors chase returns elsewhere, $100M-plus rounds are again something of a rarity. Late-stage companies, which may have otherwise continued to rely on growth capital, will face decisions as to how to adapt to a shifted landscape. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2012 2013 2014 2015 2016 2017 Split by Round Size: $100–999M $1B+ $25–50M $50–100M $0–9M $10–24M $100M+ Rounds
  11. 11. Options Available to the Late Stage State of the Markets 11 Lacking the crossover mega-rounds of 2014 and 2015, which extended private runway, today’s late-stage ventures face a familiar assortment of possibilities worth exploring ― some more lucrative than others. $100M+ Rounds Strategic Buyers IPO Financial Buyers
  12. 12. Turning to Strategic Investors ― Sell or Raise? State of the Markets 12 1. Mobileye, NXP and Quip had been announced but had not closed as of March 31, 2017. Sources: S&P Capital IQ and PitchBook. Notable Strategics’ $200M+ Acquisitions: 2016–Q1’17 Consolidation continues as tech giants look for inorganic growth and accelerated access to hot markets — particularly autotech and developer tools. Many of these acquisitions were of publicly traded companies, including the four largest: NXP, LinkedIn, Mobileye and NetSuite.1 Apple Alphabet Microsoft Oracle Intel Cisco Qualcomm Adobe Salesforce Most Active CVC’s Deal Participation: 2016–Q1’17 0 10 20 30 40 50 60 70 80 90 GV Intel Capital Qualcomm Ventures Salesforce Ventures Comcast Ventures Deals $50M+ Deals <$50M Split by Total Round Size: 1 1 1
  13. 13. Names to Know in Private Equity State of the Markets 13 1. According to The PE Hub; March 7, 2017. 2. Denotes participation. Sources: Company websites, Crunchbase, Bloomberg, The PE Hub, S&P Capital IQ and PitchBook. Notable Private Equity Firms: Technology Private equity took notice of steep declines in tech valuations in mid-2016, prompting a string of acquisitions. Be on the lookout for more investment following new fundraising in 2016 and 2017. Vista Equity Partners KKR Insight Venture Partners Thoma Bravo Silver Lake HQ Austin, TX New York, NY New York, NY Chicago, IL Menlo Park, CA Fundraise $10.5B March 2017 $13.9B March 2017 $6.0B In Process1 $7.6B Sept. 2016 $15.0B April 2017 NotableInvestments $1.8B Acquisition May 2016 $1.6B Acquisition April 2016 $1.5B Acquisition Sept. 2016 Series G2 Apr. 2017 Series C2 Feb. 2016 Series D2 June 2016 Series F Jun. 2014 Series D Oct. 2015 Series C April 2017 Minority Investment Apr. 2017 $3.0B Acquisition June 2016 $2.4B Acquisition Dec. 2014 $24B MBO2 / $67B Acq.2 Feb. 2013 / Oct. 2015 Series G March 2017 Growth Financing Aug. 2015
  14. 14. What Does It Take to Go Public Today? 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% -80% -70% -60% -50% -40% -30% -20% -10% 0% State of the Markets 14 *The “Rule of 40” is a guideline for software-as-a-service companies to manage growth (approximated by revenue) in sacrifice of profitability (approximated by operating margin). Growth rate + profitability should exceed 40%. For further reading: Source: Company SEC filings. Selected Metrics from Last 11 SaaS S-1 Filings: 2016–Q1’17 Despite investor sentiment shifting away from “growth at all costs,” all 11 of the most recently announced cloud software offerings were unprofitable as of their S-1 filing. In fact, just two exceeded the “Rule of 40”* guideline for measuring software-as-a-service company growth vs. profitability. Operating Margin RevenueGrowth Twilio5 Yext3 Alteryx2 MuleSoft2 AppDynamics3 Okta3 Apptio4 Everbridge4 Coupa4 BlackLine4 Notes: 1. Growth: Fiscal Year 2017 vs. Fiscal Year 2016; Margin: Fiscal Year 2017 2. Growth: Full Year 2016 vs. Full Year 2015; Margin: Full Year 2016 3. Growth: 9 months ended Oct. 31, 2016 vs. 9 months ended Oct. 31, 2015; Margin: 9 months ended Oct. 31, 2016 4. Growth: 6 months ended June 30, 2016 vs. 6 months ended June 30, 2015; Margin: 6 months ended June 30, 2016 5. Growth: Full Year 2015 vs. Full Year 2016; Margin: Full Year 2015 Cloudera1 Listed Filed Acquired
  15. 15. State of the Markets 15 The Early Harvest: IPO Conditions
  16. 16. 0.0x 2.0x 4.0x 6.0x 8.0x 10.0x Multiples Climb Following 2016 M&A Blitz State of the Markets 16 1. NTM revenue multiples for IPOs based on earliest estimates, adjusted to IPO date. 2. Multiples above 10x at IPO are represented with an arrow. Sources: S&P Capital IQ and Bessemer Venture Partners. Atlassian: 12x Restored Confidence “Good Times” 6-Month Gap Between IPOs Cloud software companies continue to ride a wave of restored confidence in valuation metrics as they enter the public market. After a post-election pause at the start of the year, as of March 31, 2017 two cloud software companies had successfully listed and three more had filed: Okta, Yext and Cloudera. NTM Revenue Multiples1 Twilio: 10xShopify: 11x Q2-Q3 Cloud M&A Box ApptioInstructure Xactly Cloud IPOs2 BVP Cloud Index Constituents (Median) Demandware LinkedIn Opower Jan. ’15 April ’15 July ’15 Oct. ’15 Jan. ’16 April ’16 July ’16 Oct. ’16 Jan. ’17 Coupa: 12x Alteryx MuleSoft: 12x
  17. 17. Recent Listings Exceed Their Private Values State of the Markets 17 Includes venture-backed technology companies with available private valuation data within five years of IPO. Sources: PitchBook and S&P Capital IQ. Market Cap Relative to Last Private Round for Venture-Backed Tech Companies Listing in 2016–Q1’17: As of 3/31/2017 The success of recent IPOs serves as an indication of public market confidence. These companies represent a diverse range of sectors ― from social media and adtech to communications hardware. -50% 0% 50% 100% 150% 200% Acacia .Comm. Impinj Twilio MuleSoft The Trade Desk Quantenna .Comm. Coupa Nutanix Snap Everspin .Tech. Alteryx Apptio IPO Date: 2016 2017 +1061% +423%
  18. 18. Markets’ Calm Waters Ideal for IPO Plunges State of the Markets 18Sources: S&P Capital IQ and Yahoo! Finance. 23 25 2 1 4 2 13 11 16 10 20 10 16 16 23 9 10 7 3 13 4 After the 2016 U.S. election, the VIX experienced its longest streak of sub-15 closes since 2007. Despite this period of calm, just two technology companies priced in the three months following the election. Snap broke that streak with its $3.4 billion capital raise in early March. 0 10 20 30 40 50 60 70 80 90 Jan/07 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16 Jan/17 VIX Volatility Index (Daily) vs. U.S. Tech IPO Count (Semiannual): 2007–Q1’17 2016 Election 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Q1’17 IPO Count
  19. 19. Q3 Field of $1B+ IPO Candidates Remains Crowded State of the Markets 19 U.S. Tech IPOs with Market Caps $1B+ Sized by First-Day Market Cap or Last Private Valuation: 2012–Q1’17 1. For illustrative purposes only. Sources: S&P Capital IQ and The Wall Street Journal. Snap’s IPO was just the third U.S. tech debut greater than $10 billion since Facebook’s 2012 offering. Seven others have attained that lofty valuation through private funding, with another 82 above $1 billion. 2017 …and Beyond12012 2013 2014 2015 2016 Q1 Q4 x13 x35 x30
  20. 20. State of the Markets 20 Closing Thoughts
  21. 21. Tech Drives Overall Economic Growth State of the Markets 21 Since the hype and collapse of the dot-com era almost two decades ago, technology has steadily increased in importance (and value) for the U.S. economy. Tech companies comprise nearly one-quarter of the S&P 500 index value. As a consequence, all industries face disruption from tech-native companies. 1. has been included in the technology sector. 2. Value change for Marriott is based on stock price. Marriott acquired Starwood for $13B in cash and stock in September 2016. 3. Airbnb value is based on most recent private valuation (March 2017). Sources: Company websites, PitchBook, Siblis Research, CNBC and S&P Capital IQ. S&P 500 Technology Sector1 Weighting: 1995–2016 LodgingAutos Tech-Native Other 0% 5% 10% 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 U.S. Companies by Market Cap as of 3/31/2017 with Value Change Since 3/31/2015 -13% -28% +91% -34% +17%2 +210% -19% -19% 3
  22. 22. Corporates Take up the Innovation Imperative 0 200 400 600 800 1000 1200 1400 1600 0 20 40 60 80 100 120 State of the Markets 22 Old-guard companies have recognized and embraced the need to innovate — from soup to nuts and bolts, no sphere of the global economy has been unaffected by this next generation of technology. 1. Denotes launch of CVC and/or first investment. 2. Denotes announcement of corporate initiative (accelerator, research facility, etc.) Sources: Company websites, Crunchbase, Fortune, Bloomberg, The Wall Street Journal, Star Tribune, Xconomy, Skift and CB Insights. Number of New Corporate Venture Capital Groups: 2011–2016 Deals with CVC Participation: 2011–2016 2011 2012 2013 2014 2015 2016 2017 1 1 2 2 1 1 1 1 2 2 2 1 1 2 2 1 2 1 1 1 1 1 11
  23. 23. Updated: SVB’s Interactive Unicorn Navigator State of the Markets 23 Use our Unicorn Navigator to follow the journeys of the billion-dollar club as they traverse the venture landscape toward an eventual exit – now updated with 2017 entrants: C3 IoT, View and Zoom Video. Sources: The Wall Street Journal, PitchBook and S&P Capital IQ.
  24. 24. Report Authors State of the Markets 24 Steve Allan, CFA Head of External Insights & Analytics Sean Lawson Senior Manager SVB Analytics Steve Allan, CFA is the Head of External Insights & Analytics and 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 Senior Manager with SVB Analytics and SVB Securities, responsible for leading research and insights spanning early- and growth-stage venture-backed technology companies. Steven Pipp Senior Associate SVB Analytics Steven Pipp is a Senior Associate with SVB Analytics and SVB Securities, responsible for valuation, research and strategic advisory engagements for venture-backed technology companies. Special Thanks Tim Lee, CFA Senior Credit Analyst SVB Asset Management Daeyoung Choi, CFA Credit Analyst SVB Asset Management Steven Kakowski Senior Associate SVB Analytics Natalie Dillon Senior Associate SVB Analytics Drew Gonzales Associate SVB Analytics Melina Bergkamp Associate Silicon Valley Bank
  25. 25. About Silicon Valley Bank For 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. State of the Markets 25 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. SVB Securities is a non-bank affiliate of Silicon Valley Bank and a member of SVB Financial Group. Member FINRA and SIPC. ©2017 SVB Financial Group. All rights reserved. SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license. Silicon Valley Bank is a member of the FDIC and the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB). CompID – 511 About SVB Analytics SVB 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.