State of the Markets Inside Views on the Health and Productivity of the Global Innovation Economy - Silicon ...
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State of the Markets
Inside Views on the Health and Productivity
of the Global Innovation Economy
Second Quarter 2019
SPECIAL REPORT:
Canadian Venture on the Rise
State of the Markets: Second Quarter 2019
Innovation Marches Onward
Despite fears of slower global growth, innovation marches onward. The record clip of fundraising and investing in
2018 shows no signs of slowing. Technology now represents nearly one-third of the value of the S&P 500 Index. As
innovation creates new markets ― both geographically and across industries ― the growing diversity of companies
simply adds to tech’s resiliency.
Investors agree that some of the best opportunities are in the US ecosystem. Appetite for innovation returns
remains robust. Successive fund raises by venture firms are larger than ever, and family offices and private equity
firms are eager to participate. But exciting prospects also exist overseas and north of the border, where Canada is
capitalizing on its leadership role in artificial intelligence.
Yet high-growth companies have never been without risk, and rising political and regulatory scrutiny could slow
tech’s velocity. And while we advocate for a healthy dialogue about the US tech giants’ unchecked power and the
foreign ownership of cutting-edge technologies, we also believe that the innovation economy is positioned to forge
ahead.
Bob Blee
Head of Corporate Finance
Silicon Valley Bank
State of the Markets: Second Quarter 2019 2
State of the Markets: Second Quarter 2019
3 Macro: Tech Shines Amid Dull Global Growth
8 Fundraising: Venture Dollars Climb from All Sides
13 M&A: Acquisitions Slow as Startups Aim for Growth
18 Regulations: Potential New Hurdles to Exits
23 Special Report: Canadian Venture on the Rise
State of the Markets: Second Quarter 2019 3
Macro: Tech Shines Amid
Dull Global Growth
State of the Markets: Second Quarter 2019 4
Fears of a Macro Slowdown Have Investors on Edge
While US equity markets have powered through the 2010s, they have not been immune to recent
concerns of slowing economic growth. The International Monetary Fund (IMF) cut its global growth forecast
for the third time in six months to the lowest rate since the global financial crisis (GFC).
US Market Return (S&P 500) EU Market Return (MSCI Europe) China Market Return (MSCI China)
200% 200% 200%
150% 150% 150%
100% 100% 100%
50% 50% 50%
0% 0% 0%
-50% -50% -50%
2010 2013 2016 2019 2010 2013 2016 2019 2010 2013 2016 2019
US Real GDP Growth & Forecast EU Real GDP Growth & Forecast China Real GDP Growth & Forecast
12% 12% 12%
9% 9% 9%
6% 6% 6%
3% 3% 3%
0% 0% 0%
-3% -3% -3%
2010 2013 2016 2019 2010 2013 2016 2019 2010 2013 2016 2019
Note: Market returns are net total return in USD; GDP forecasts by IMF.
Source: IMF, S&P Capital IQ and SVB analysis. State of the Markets: Second Quarter 2019 5
Tech Rises to the Top
Following the hype and subsequent collapse of the dot-com era, tech companies have proven their
importance (and value) to the US economy. Nearly one-third of the S&P 500 Index is represented by
tech companies – the largest of any industry.
S&P 500 Tech Industry1 Weighting: 1999—2019 Largest S&P 500 Companies by Market Cap
35%
2000
31%
30%
2005
25%
2010
20%
15%
2015
10%
Q1’19
5%
0%
1999 2003 2007 2011 2015 2019 Tech Other
Note: 1) Technology industry includes Amazon as well as companies that were previously classified as
Technology prior to the GICS industry reclassification in September 2018.
Source: PitchBook, S&P Capital IQ and SVB analysis. State of the Markets: Second Quarter 2019 6
Nontraditional Industries Prime for Disruption
The traditional definitions for tech have eroded as innovation spreads to old guard industries.
Areas ranging from beauty to construction are facing disruption from venture-backed companies.
US Venture Capital Investment: 2010–2018
AgTech: Beauty & FemTech: Construction Tech:
$1,500M $1,500M $1,500M
$1,000M $1,000M $1,000M
$500M $500M $500M
$0M $0M $0M
2010 2012 2014 2016 2018 2010 2012 2014 2016 2018 2010 2012 2014 2016 2018
Source: PitchBook and SVB analysis. State of the Markets: Second Quarter 2019 7
Beyond the Bay: Startups Extend to New Cities
Tech’s influence is expanding, not only in new industries, but also in new geographies. Silicon Valley
remains king, but rising real estate and talent costs are prompting companies to look elsewhere.
Headquarters and Secondary Locations for US Venture-Backed Tech Companies Valued at $250M+
350
Secondary Location
Headquarters
300
250
200
150
100
50
0
Bay Area NYC Texas So Cal Boston Seattle Chicago D.C. Denver Atlanta Other
Source: PitchBook and SVB analysis. State of the Markets: Second Quarter 2019 8
Fundraising: Venture Dollars
Climb from All Sides
State of the Markets: Second Quarter 2019 9
VCs Raising More Capital with Each Trip Back to LPs
Storied firms on Sand Hill Road are attracting more capital for each successive fund, climbing to
almost 50% more than their prior fundraise. This trend helped contribute to records in 2018,
including the most $500M+ funds and the first year with double-digit $1B+ funds.
US VC Fundraising: Median Step-Up US VC Fundraising: $500M+ and $1B+ Funds
in Fund Size for Same Family of Funds
+50%
1.50x 25
$1B+ $500M+
20
+25%
1.25x
15
1.00x
0%
10
0.75x
-25%
5
0.50x
-50% 0
2010 2012 2014 2016 2018 2010 2012 2014 2016 2018
Source: PitchBook and SVB analysis. State of the Markets: Second Quarter 2019 10New Funds Move to Institutionalize Early Rounds
At the earliest stages, venture capital available to emerging innovation companies helped push round
sizes for seed rounds well beyond their historical average, which had been in line with angel rounds.
The return of capital from upcoming IPOs could push both round sizes higher.
US VC Fundraising: First-Time Funds Early-Stage US Tech Median Round Size: 2010—2018
$5.0B 50 $2.0M
Angel
Seed
$4.0B 40
$1.5M
$3.0B 30
$1.0M
$2.0B 20
$0.5M
$1.0B 10
$0.0B 0 $0.0M
2010 2012 2014 2016 2018 2010 2012 2014 2016 2018
Source: PitchBook and SVB analysis. State of the Markets: Second Quarter 2019 11Diverse Pools of Capital Chase Innovation Returns
Traditional venture firms are no longer the only game in town. Newly professionalized family office
and capital-rich private equity investors are participating in venture rounds at an increasing pace,
nearing the highs from 2015 in deal level and keeps surpassing those capital marks.
Notable Family Offices Investors in Tech Venture1 Notable Private Equity Investors in Tech Venture1
VC Deals: 79 VC Deals: 63 VC Deals: 59 VC Deals: 42 VC Deals: 28 VC Deals: 42 VC Deals: 31 VC Deals: 31 VC Deals: 26 VC Deals: 22
Family Offices’ Venture Investment in US Tech2 Private Equity Firms’ Venture Investment in US Tech2
$15B 300 $40B 1,200
Capital Invested Deal Count Capital Invested Deal Count
$35B
$12B 240
$30B 900
$9B 180 $25B
$20B 600
$6B 120 $15B
$10B 300
$3B 60
$5B
$0B 0 $0B 0
2010 2012 2014 2016 2018 2010 2012 2014 2016 2018
Note: 1) Deal count based on participation in US tech venture rounds from 2010–2018. 2) Investment dollars
include full rounds that received participation from at least one investor from the class.
Source: PitchBook and SVB analysis. State of the Markets: Second Quarter 2019 12Next Wave of Capital Will Come After Lockups
Early signs indicate 2019 should be the most robust year of value realization via IPOs for U.S.
venture-backed tech companies this decade. But the IPO listing is only the start of the journey for
insiders, including venture firms, who must weather six months of market movement before exiting.
Aggregate Valuation of US VC-Backed Tech IPOs Post-IPO Performance for 2010–2018 US Tech IPOs
Percentiles:
$150B + 70%
+60% 90th
$125B
+ 50%
+40%
$100B
+ 30% 75th
$75B + 20%
+10%
$50B 50th
0%
1 3 5 7 9 11 13 15 17 19 21 23 25
-10%
25th
$25B
-20%
10th
-30%
$0B
2010 2013 2016 2019 -40%
Source: PitchBook, S&P Capital IQ, CBInsights and SVB analysis. State of the Markets: Second Quarter 2019 13M&A: Acquisitions Slow as
Startups Aim for Growth
State of the Markets: Second Quarter 2019 14Opting for Growth Capital vs. an Early Exit
With the abundance of available capital, firms are increasingly choosing growth rounds – even mega-
growth rounds – over similar-sized exits. This could signal that companies want to mature before
securing an even bigger exit. Or are these firms simply shying away from public market scrutiny?
US Tech Growth Rounds vs. Exits: 2010–2018 US Tech Mega-Rounds vs. Mega-Exits: 2010—2018
150 150
Growth Rounds: $50M–$100M Mega-Rounds: $100M+
Exits: $250M–$1B Mega-Exits: $1B+
125 125
100 100
75 75
50 50
25 25
0 0
2010 2012 2014 2016 2018 2010 2012 2014 2016 2018
Source: PitchBook and SVB analysis. State of the Markets: Second Quarter 2019 15Across US, Valuations Climb for M&A
While fundraising and investing have soared this decade, the number of acquisitions taking place has
remained constant. However, deals executed in 2018 were roughly 3x the size of those in 2010.
VC-Backed M&A: Bay Area VC-Backed Tech M&A: East Coast M&A Value by Region (Median)
$1B+ $100M–1B $1–100M $1B+ $100M–1B $1–100M
100 100 $250M
Bay Area
East Coast
75 75
West Coast Ex-Bay Area
50 50 Mid-Regions
$200M
25 25
0 0
2010 2012 2014 2016 2018 $150M
2010 2012 2014 2016 2018
M&A: West Coast Ex-Bay Area VC-Backed Tech M&A: Mid-Regions
$1B+ $100M–1B $1–100M $1B+ $100M–1B $1–100M $100M
100 100
75 75
50 50 $50M
25 25
0 0 $0M
2010 2012 2014 2016 2018 2010 2012 2014 2016 2018 2010 2012 2014 2016 2018
Source: PitchBook and SVB analysis. State of the Markets: Second Quarter 2019 16Bucking the Trend: Financial Acquisitions Mount
As financial buyers grow more comfortable with tech, particularly companies with recurring
revenue, they’re increasingly stepping in to purchase those startups. Financial buyers also are
filling a void – buying companies that may be unable to attract soaring venture rounds.
US VC-Backed M&A: Strategic vs. Financial Activity Financial Acquisitions: % of Total M&A Activity
800 40%
Strategic Acquisitions
Financial Acquisitions
700 35%
600 30%
500 25%
400 20%
300 15%
200 10%
100 5%
0 0%
2010 2012 2014 2016 2018 2010 2012 2014 2016 2018
Source: PitchBook and SVB analysis. State of the Markets: Second Quarter 2019 17US Tech Looks To International Opportunities
The innovation economy’s best and brightest are putting their abundant capital to work abroad,
with 20% of their acquisitions taking place outside of the US. On the back of a strong dollar, their
capital is going even further for expansion overseas.
International Acquisitions by US Tech Unicorns Notable Int’l Acquisitions by US Tech Decacorns
25
Rest of World
Asia
Europe UAE United Kingdom
$3.1B Acquisition $72M Acquisition
20 March 2019 Oct.2018
15 Canada Demark France United Kingdom
$300M Acq. Acquisition Acquisition Acquisition
Feb. 2017 Jan. 2019 Dec. 2018 Nov. 2017
10
Singapore China Spain Israel
$500M Acq. $400M Acq. Acquisition Acquisition
Aug. 2017 Apr. 2018 Nov. 2017 Aug. 2017
5
Israel Italy Canada Serbia
0
Switzerland UK Finland
2010 2013 2016 2019
Source: PitchBook, company websites and SVB analysis. State of the Markets: Second Quarter 2019 18Regulations: Potential New
Hurdles for Exits
State of the Markets: Second Quarter 2019 19Tech Giants Spend Big but Now Face Scrutiny
The Big 5 US tech giants have gone unchecked despite their growing influence. Now, as they
outspend the entire tech venture ecosystem in R&D dollars alone, they are facing increasing
political scrutiny. Are their innovations a true benefit to society?
R&D Expenditure by Big 5 US Tech Companies vs. US Tech Venture Capital Invested
$100B
V
e
n
t
$80B u
r
e
$60B
$40B
$20B
$0B
2010
2010 20112011 20122012 20132013 20142014 20152015 20162016 20172017 20182018
Source: PitchBook, S&P Capital IQ and SVB analysis. State of the Markets: Second Quarter 2019 20Attractive Acquisition Values from Big 5 in Jeopardy
As the Big 5 have grown, they are executing fewer but larger M&A transactions – the median deal
value more than doubled this past decade. Again, this is an attractive exit for startups and investors,
but political headwinds could block (or limit) this exit path.
Tech Big 5 Acquisitions of Venture-Backed Tech Big 5 Acquisitions of Venture-Backed
Tech Companies1 Tech Companies: Rolling 30-Deal Median
$3B + $0.3B
$300M
Alphabet
Amazon
Apple
Facebook
Microsoft
$2B $0.2B
$200M
$1B $0.1B
$100M
$0B $0.0B
$0M
2010 2012 2014 2016 2018 2010 2012 2014 2016 2018
Source: PitchBook and SVB analysis. State of the Markets: Second Quarter 2019 21CFIUS Could Impact 20% of VC-Backed Acquisitions
As geopolitical tensions rise, the Committee on Foreign Investment in the United States (CFIUS) is
paying close attention. This has the potential to limit foreign acquirers who have been buying a
growing share of US start ups.
Strategic Acquisitions of US VC-Backed Tech Companies Most Acquisitions by Country: 2010–2018
700 35%
Domestic Acquirer Deal Deal
International Acquirer Country
Count Value
% International
600 30%
#1 United Kingdom 137 $15B
#2 Canada 116 $8B
500 25%
#3 Japan 59 $22B
400 20%
#4 Germany 58 $32B
#5 France 49 $8B
300 15%
#6 China 43 $5B
200 10%
#7 Israel 35 $1.3B
#8 India 31 $1.3B
100 5%
#9 South Korea 28 $1.6B
0 0%
#10 Netherlands 27 $24B
2010 2012 2014 2016 2018
Source: PitchBook and SVB analysis. State of the Markets: Second Quarter 2019 22Unicorns Rely on Capital Boosts From Abroad
It takes a village. In the cases of Uber and Lyft, a global network of investors played significant
roles in financing their growth from startups to giants. Regulators will need to weigh both the
benefits and consequences to foreign investment in U.S. tech companies.
Uber & Lyft: International Investors by Country
Canada United Kingdom Russia Japan
*
*
Rest of Europe Middle East China
*
South America India & SE Asia Australia
Notes: 1) * Represents beneficial ownership of more than 5% at IPO
Source: PitchBook and SVB analysis. State of the Markets: Second Quarter 2019 23Special Report:
Canadian Venture on the Rise
State of the Markets: Second Quarter 2019 24A Steady Climb: Building Venture in Canada
On the backs of strong universities and consistent government support for R&D, venture investment
has thrived in Canada — rising nearly fourfold this decade. Programs remain aimed at continued
flows of both capital and talent into the burgeoning ecosystem.
Top Canadian Universities by Venture Capital Investment in Canada
World Rank in Computer Science1
$4.0B
#18 #34
Established: 1827 Established: 1878
Location: Toronto, ON Location: Montreal, QC
$3.0B
Enrollment: 72,202 Enrollment: 37,311
#35 #41 $2.0B
Established: 1915 Established: 1957
Location: Vancouver, BC Location: Waterloo, ON
Enrollment: 53,566 Enrollment: 32,395
$1.0B
#79 #98
Established: 1821 Established: 1908
Location: Montreal, QC Location: Edmonton, AB
$0.0B
Enrollment: 31,060 Enrollment: 31,844
2008 2010 2012 2014 2016 2018
Notes: 1) Universities in Top 100 of Times Higher Education World Rankings for Computer Science in 2019.
Source: Times Higher Education, university websites, PitchBook and SVB analysis. All data in CAD. State of the Markets: Second Quarter 2019 25Startup to Scale-Up: Canadians Face “Valley of Death”
Investment continues to climb for startups, but funding gaps remain. Early stage activity remains
abundant: Almost two-thirds of deals were for less than $1M. While their US counterparts raised more
than 60% of capital through $25M+ growth rounds, Canadian firms raised just 40% since 2016.
Tech Venture Deal Count (% of Total): 2016–2018 Tech Venture Capital Inv. (% of Total): 2016—2018
70% 70%
US CAN US CAN
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
$0—$1M $1M—$10M $10M—$25M $25M+ $0—$1M $1M—$10M $10M—$25M $25M+
Source: PitchBook and SVB analysis. All data in CAD. State of the Markets: Second Quarter 2019 26As Foreign Capital Arrives, Toronto Cements Its Place
Overseas capital continues to fill the gaps. Growth rounds, in particular, have relied on foreign
participation (80%+ of which is from the US). Toronto firms led the charge, receiving eight of the 13
mega-rounds. In fact, more than 40% of all Canadian VC dollars now flow to the city.
Canada Tech Venture: Participation by Foreign Toronto’s Share of Canada Tech Venture Capital
Investors by Round Size: 2010—2018
Invested Capital: Invested Capital:
100% 50%
Total Investment First Financings
$25M+ 46%
80% 40%
41%
$10–25M
60% 30% 33%
$1–10M
28%
40% 20%
20% 10%
$0–1M Rounds
0%
0%
2010 2012 2014 2016 2018
2010–2014 2015–2018 2010–2014 2015–2018
Source: PitchBook and SVB analysis. All data in CAD. State of the Markets: Second Quarter 2019 27AI: An Opportunity for Canada to Lead the World
The now worldwide phenomenon started in large part in the halls of Canadian universities. As
artificial intelligence provides the platform of tomorrow, new industries are opening where Canadian
startups could find an edge and achieve the global-scale exits to drive the next chapter of innovation.
North American Venture Investment: 2010–2018
AI/Machine Learning Autonomous Vehicles Smart Cities & Micro-Mobility
$20B
$20B $20B $20B
Today Tomorrow Future
$15B $15B $15B
$10B $10B $10B
$8B
$5B $5B $5B
$2B
$0B $0B $0B
2010 2012 2014 2016 2018 2010 2012 2014 2016 2018 2010 2012 2014 2016 2018
World-Leading AI Researchers U of Toronto + Uber: Self-Driving Car Group Toronto + Alphabet: Sidewalk Labs
Geoffrey Hinton Yoshua Bengio Richard Sutton Raquel Urtasun
Source: PitchBook, company and university websites and SVB analysis. All data in CAD. State of the Markets: Second Quarter 2019 28Appendix
State of the Markets: Second Quarter 2019 29Authors
Bob Blee Steven Pipp, CFA Andrew Pardo
Head of Vice President, Research Sr. Associate, Research
Corporate Finance spipp@svb.com apardo@svb.com
bblee@svb.com
Bob Blee heads Silicon Valley Bank’s Steven Pipp is a Vice President based in Andrew Pardo is a Senior Research Associate
Corporate Finance Group, which leads SVB’s San Francisco responsible for capital markets based in San Francisco responsible for the
relationships with public and late-stage private research and data-driven analysis of the capital markets research and data-driven
companies in the Innovation sector throughout innovation economies that SVB serves globally. analysis of the innovation economies that SVB
North America, providing a full suite of lending In this role, he has led research efforts serves globally. In this role, he supports
and banking products, as well as guidance as a exploring investment, fundraising and exit research efforts exploring investment,
trusted partner, helping our clients succeed dynamics between the venture ecosystems of fundraising and exit dynamics in the global
and quickly scale. the US, Canada, Europe, China and SE Asia. venture ecosystem.
Previously, Bob held a variety of roles in SVB’s Prior to his research role, Steven managed Prior to this role, Andrew was a Buy-Side
California and Midwest regions, including strategic advisory and valuation engagements Equity Research Analyst for a $100B+ asset
heading seed, early and mid-stage for venture-backed technology companies as manager based in the Bay Area. His area of
Infrastructure, Hardware, Consumer Internet part of SVB Analytics. Before joining SVB, coverage spanned the domestic and
and Fintech banking in the Bay Area and Steven worked in Minneapolis as a consultant international Financials sector. Andrew earned
Southern California and was responsible for and entrepreneur with a focus on clean energy a Bachelor of Science in accounting from
SVB’s Mezzanine Lending and Loan technology. Loyola Marymount University.
Syndications practices.
Steven earned a Master of Science in Finance
Bob sits on the nonprofit board of the Network from Boston College and a Bachelor of Science
for Teaching Entrepreneurship (NFTE) and the in Business from the University of Minnesota.
Silicon Valley Advisory Council of the In addition, he holds the Chartered Financial
Commonwealth Club. He is also active with his Analyst (CFA) designation.
alma mater, the University of Illinois.
State of the Markets: Second Quarter 2019 30Disclaimers
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.
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State of the Markets: Second Quarter 2019 31About Silicon Valley Bank
For more than 35 years, Silicon Valley Bank has helped innovative #SVBSOTM
companies and their investors move bold ideas forward, fast. SVB
provides targeted financial services and expertise through its www.svb.com
offices in innovation centers around the world. With commercial,
international and private banking services, SVB helps address the @SVB_Financial
unique needs of innovators.
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See complete disclaimers on previous page.
© 2019 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).You can also read
