State of the Markets Inside views on the health and productivity of the innovation economy
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State of the Markets Inside views on the health and productivity of the innovation economy Second Quarter 2018
State of the Markets: Second Quarter 2018
4 Macro Snapshot: Long-Lived Bull Market
7 IPO Conditions: Value in the Face of Volatility
12 Late Stage: Another Round of Mega-Rounds
17 Global Perspective: Tension Over Tech
22 Special Report: Prepared for a Downturn?
State of the Markets 2
State of the Markets: Second Quarter 2018
The Good Times Roll, Even as Risks Rise
The bull market powers on, and money continues to flow into the innovation economy. At the same time, we are
seeing a reemergence of volatility and a bevy of new risks — including tighter monetary policy and the specter of a
trade war — but it’s still status quo for now in the capital markets.
Despite market turbulence, the first quarter of 2018 ushered in several high-profile IPOs, and consumer- and
enterprise businesses are finding success as public entities. Furthermore, companies reluctant to go down the IPO
route found alternative paths. After years of successful fundraising, the world remains awash in capital, and
sovereign wealth funds appear poised for even greater contributions. All of these factors are expected to provide
further tailwinds for the tech sector.
This remains an exciting time for tech around the globe, with some caveats. Innovation companies thrive on open
markets, and rich valuations could be undermined by strained geopolitics, wavering consumer confidence and a
releveling of investors’ portfolio mix as interest rates rise. While the good times roll, economic cycles don’t last
forever, and the trends don’t always point upward. For the moment, however, it’s game on.
Bob Blee
Head of Corporate Finance
State of the Markets 3
Long-Lived
Bull Market
State of the Markets 4
The Second Longest Bull Market Powers On
Since the end of the global financial crisis, equities have been enjoying a nine-year bull run —
the second longest since the Second World War. The longest streak was also tech-powered, but
ended in the dot-com bust of 2000. Will things end differently this time?
Cumulative Return: Longest S&P 500 Market Runs Since 1945
450%
6/13/1949
June 1949 – Aug. 1956
Dot-Com Bubble
10/3/1974
Oct. 1974 – Nov. 1980
400%
8/12/1982
Aug. 1982 – Aug. 1987
Oct. 1990 –
10/11/1990 Mar. 2000
350%
Oct. 2002 –
10/9/2002 Oct. 2007
Mar. 2009 –
3/9/2009 Active
300%
Current
250%
200%
150%
100%
50%
0%
00 11 22 33 44 55 66 77 88 99
Duration of Bull Market (Years)
Sources: LPL Research, S&P Capital IQ and SVB analysis. State of the Markets 5
Signaling the End of Easy Money
Strong economic data suggests that the Federal Reserve will continue raising interest rates.
This may allow money managers to capture more attractive yields in less-risky asset classes.
Concurrently, its unwinding of $1T in assets will also reduce the availability of capital.
Fed Funds Effective Rate: 2010–2020 Fed Balance Sheet (Projected2): 2010–2021
5.0% $4.5T
Actual MBS3
Midpoint of Forecasts1 Treasuries
4.5% $4.0T
4.0% Fed Plan
$3.5T
3.5%
$3.0T
3.0%
$2.5T
2.5%
$2.0T Without
2.0% Reinvestment
$1.5T
1.5%
$1.0T
1.0%
0.5% $0.5T
Historical Projected
0.0% $0.0T
2011 2013 2015 2017 2019 Long 2011 2013 2015 2017 2019 2021
2009 2011 2013 2015 2017 2019 2021 2009 2011 2013 2015 2017 2019 2021
Run
Notes: 1) & 2) Forecasts and projections provided by Federal Open Markets Committee of the Federal Reserve.
3) Mortgage-backed securities.
Sources: S&P Capital IQ, Federal Reserve Bank of New York and SVB analysis. State of the Markets 6
Value in the
Face of Volatility
State of the Markets 7Spotify Lists, Undeterred by Market Turbulence
History confirms that tech companies prefer calm markets for IPOs. But even the recent surge in
volatility couldn’t derail Spotify from its nontraditional direct listing. In fact, SPOT experienced
milder swings relative to the early trading of SNAP.
Volatility (VIX)1 vs. U.S. Venture-Backed Tech IPOs: 2005–1H’182 Early Trading Values vs. Offer Price
80 +80%
Snap
60 Spotify
+70%
40
+60%
20
+50%
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 ’18 +40%
25
+30%
20
15 +20%
10
+10%
5
Opening First Day
Trade Close
0 +0% IPO Price or Reference Value First Trade High Close 1-Week Later
IPO Offer Price/ First Day One Week
1H'05 2H' 05 1H'06 2H' 06 1H'07 2H' 07 1H'08 2H' 08 1H'09 2H' 09 1H'10 2H' 10 1H'11 2H' 11 1H'12 2H' 12 1H'13 2H' 13 1H'14 2H' 14 1H'15 2H' 15 1H'16 2H' 16 1H'17 2H' 17 1H'18
Reference Price High Later
Notes: 1) Volatility presented is implied forward volatility of the S&P 500.
2) 1H’18 IPO count includes six completed IPOs as of 4/20/18 and three upcoming listings.
Sources: S&P Capital IQ, PitchBook, Renaissance Capital and SVB analysis. State of the Markets 8IPOs Don’t Happen Overnight
Two decacorn debuts captured Q1 headlines, but their decade-plus journeys illustrate different
paths to their current robust valuations. Meanwhile, China’s Xiaomi also boasts a “stale”
valuation from years ago, but that could double in its highly anticipated IPO later this year.
Valuation Progression from Founding to IPO (Relative to Final Private Round) Xiaomi
$100B IPO
2.0x Late 2018
Spotify Dropbox Company Xiaomi Snap +117%1
2006 2007 Year Founded 2010 2010
Spotify
$27B Listing
1.5x April 2018
+33%
Dropbox
$8B IPO
Last
March 2018
1.0x
Private
Valuation
+20%
Snap
$20B IPO
March 2017
0.5x -3%
0.0x
12 11 10 9 8 7 6 5 4 3 2 1 IPO +1
-8.8
-8.5
-8.2
-4.8
-4.5
-4.2
0.2
0.5
0.8
-10.8
-10.5
-10.2
-0.8
-0.5
-0.2
-9.2
-11.8
-11.5
-11.2
-9.8
-9.5
-6.8
-6.5
-6.2
-5.2
-3.8
-3.5
-3.2
-2.8
-2.5
-2.2
-1.8
-1.5
-1.2
-7.8
-7.5
-7.2
-5.8
-5.5
Years Prior to Public Offering
Note: 1) Xiaomi IPO value, $100B, based on high end of range as reported by The Wall Street Journal, March 5, 2018.
Sources: The Wall Street Journal, S&P Capital IQ, PitchBook and SVB analysis. State of the Markets 9Both Enterprise and Consumer Find Success
Struggling to prove their growth stories, the stocks of Snap and Blue Apron have sunk, dragging
down public perception of consumer tech. However, the data shows solid early performances for
both enterprise- and consumer-facing businesses can enjoy success relative to private valuations.
Market Cap Relative to Last Private Valuation: $1B+ U.S. Tech IPOs from March 2017–March 2018
5.0x
Consumer $2.0B1
Enterprise 6.6x LPV 2
$4.1B
4.1x LPV
4.0x $5.9B4
3.9x LPV
$4.2B
3.6x LPV
$3.3B $3.1B
3.0x 3.1x LPV 3.1x LPV
$1.9B $1.2B
2.0x 2.3x LPV 2.3x LPV
$12.3B $2.2B
1.0x 1.2x LPV 1.4x LPV
$19.5B
$3.0B 1.0x LPV
0.7x LPV
$0.4B
0.2x LPV
0.0x
IPO3
01/17 1
02/17 2
03/17 3
04/17 4
05/17 5
06/17 6
07/17 7
08/17 8
09/17 9
10/17 10
11/17 11
12/17 12
01/18 13
02/18
Months Trading Since IPO
Notes: 1) Market Cap is as of March 31, 2018. 2) Market cap as of March 31, 2018 relative to the last private valuation
available. 3) IPO offer price is the first data point for each company to capture the pop from its first day of trading.
4) MuleSoft announced its sale to Salesforce on March 20, 2018.
Sources: S&P Capital IQ, PitchBook and SVB analysis. State of the Markets 10Public Multiples Bode Well for Venture Deals
Valuations for forthcoming private SaaS venture deals continue to closely track their public
company counterparts as consensus grows around key business metrics. Growth is still being
rewarded: The much higher revenue growth rates for companies within the private transactions
set (~60% vs. BVP1 median: ~30%) compensates for the typical illiquidity discount.
Enterprise Software Valuations: Revenue Run Rate Multiple2
10.0x
9.0x Median of Next 20 Private Forecast4
Enterprise Software Transactions3
8.0x
7.0x
6.0x
5.0x
Median of BVP Cloud Index
4.0x Example: In mid-November 2015, the Public Companies
median of the BVP Cloud Index was 6.6x.
The next 20 transactions (as captured by
3.0x SVB data) had a median multiple of 7.6x.
2.0x
2015 2016 2017 Q1’18
Notes: 1) More infoformation on BVP Cloud Index at: https://www.bvp.com/strategy/cloud-computing/index. 2) Revenue run rate
= Most Recent Quarter’s Revenue x 4. Valuations based on pre-money for private transactions and total enterprise value for public
companies. 3) Data based on SVB’s observations of ~120 private market transaction multiples of venture-backed companies with
$25M+ in run rate. 4) Forecast based on median premium for private transactions relative to public market multiples.
Sources: Bessemer Venture Partners, S&P Capital IQ, SVB proprietary data and SVB analysis. State of the Markets 11Another Round of
Mega-Rounds
State of the Markets 12Private Markets Dominate
Traditionally, companies seeking significant capital would accept the added transparency and
scrutiny of the public markets. But starting in 2014, the demand and funding for PIPOs1 has
exploded. For the past four years, mega-rounds have outpaced IPOs every quarter.
Deal Count of U.S. Venture-Backed Tech IPOs vs. PIPOs: 2012–Q1’18
30
U.S. Tech IPOs
U.S. Tech PIPOs
25
20
15
10
5
0
Q1
1 Q2
2 Q33 Q4
4 Q1
1 Q2
2 Q33 Q4
4 Q1
1 Q2
2 Q3
3 Q4
4 Q1
1 Q2
2 Q3
3 Q4
4 Q1
1 Q2
2 Q3
3 Q4
4 Q1
1 Q2
2 Q3
3 Q4
4 Q1
1
2012 2013 2014 2015 2016 2017 2018
Note: 1) “Private IPOs,” or “PIPOs” are $100M+ private venture rounds.
Sources: PitchBook and SVB analysis. Q2 State of the Markets 13SoftBank Vision Fund Emerges as Third Propellant
Mutual funds and hedge funds have scaled back their fervor since 2013–2015, and private equity
seemingly awaits more favorable valuations. So what led to 21 PIPOs in Q1 — the third highest to
date? SoftBank’s Vision Fund has emerged as a force and remains hungry for innovative tech assets.
Participation Rates from Nontraditional Venture Investor Classes in U.S. Tech PIPOs: 2012–Q1’18
40%
39% 80
SoftBank Vision Fund PIPO Deal Count
Crossover Investors
35% 70
Private Equity/Family Offices 32%
30% 60
24%
25% 50
20% 40
15% 30
10% 20
5% 10
0% 0
2012 2013 2014 2015 2016 2017 Q1’
2018
Notes: 1) Crossovers include BlackRock, Coatue Management, Fidelity Investments, Franklin Templeton Investments,
T. Rowe Price, The Hartford Financial Services, Tiger Global Management and Wellington Management. 2) Private
Equity/Family Offices include BlackRock Private Equity Partners, General Atlantic, ICONIQ Capital, Insight Venture
Partners, Kohlberg Kravis Roberts, Silver Lake, TPG, Vulcan Capital and Warburg Pincus.
Sources: PitchBook and SVB analysis. State of the Markets 14Private Investment Outpaces VC Fundraising
Participation by these nontraditional investors, as well as corporate and international investors,
has pushed investment in the innovation economy to precarious heights. Venture-backed
companies raised 2.5x what their venture firm counterparts received in commitments in 2017.
U.S.
$90B Venture Investment & Fundraising: 2008–2017 Venture Investment Dollars Relative to VC Fundraising
$80B 3.0x
U.S. Venture Investment
U.S. Venture Fundraising
$70B
2.5x
$60B
2.0x
$50B
$40B 1.5x
$30B
1.0x
$20B
0.5x
$10B
$0B 0.0x 200 % 300 % 400% 500 % 600% 700 % 800% 900% 1000% 1100%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2011 2014 2017
Sources: PitchBook and SVB analysis. State of the Markets 15Venture Prepares for Even More Mega-Rounds
Venture firms are adjusting to this cash-rich environment as well. The upper echelon of venture
capitalists are stocking their war chests with significant capital to ensure continued participation,
even as their portfolio companies raise multiple late-stage rounds.
The Three Largest Venture Funds Raised Annually as a Percentage Sequoia Capital: 2018 Fundraising1
of Total Fundraising in That Year
35% $14B
$12B India
30%
China
25% $10B
United
States
20% $8B
15% $6B
Global
10% $4B
Growth
5% $2B
0% $0B
2013 2014 2015 2016 2017 2018 2 1
2018
Notes: 1) Based on reported anticipated values as of March 5, 2018. 2) Includes Sequoia Global Growth fund at anticipated $8B.
Sources: PitchBook, The Wall Street Journal and SVB analysis. State of the Markets 16Global Tension Over Tech
State of the Markets 17Trade Wars Matter, Even for Tech
Technology companies thrive in open markets. Three of the five US tech giants recognize more
revenue overseas than in the US. Both sides in the Salesforce.com acquisition of MuleSoft
recognize approximately one-third of revenue abroad. Access to global markets is critical to
maintain the valuations of innovation companies today.
Select U.S. Tech Company Revenue by Region: 2017
100%
63% 32% 53% 50% 56% 31% 39%
75%
International
Revenue
50%
25%
United States
Revenue
37% 68% 47% 50% 44% 69% 61%
0%
AAPL AMZN GOOG MSFT FB CRM MULE
Sources: S&P Capital IQ and SVB analysis. State of the Markets 18Hemispheres of Influence: Ridesharing Rivals
In 2014, with a newly minted $40B valuation, Uber looked set to conquer the world. Then China’s
DiDi Chuxing established a network of global partners, contesting Uber’s access to key markets.
Since, Uber has sold operations to local rivals in three markets, and the battle rages on elsewhere.
Uber and DiDi Chuxing: Valuations, Fundraising and Notable Global Competitions
$70B Eastern Europe
Valuation
North America China
$56B
Uber combined operations with Yandex
DiDi invested in Estonia’s Taxify Valuation
Middle East
DiDi invested in Lyft’s Series E & F Uber sold its China operations to DiDi
Latin America Southeast Asia
DiDi invested in UAE-based Careem
India
$16B Uber sold its SE Asia operations to Grab $17B
DiDi invested in, and then acquired, 99
Raised
DiDi invested in Grab’s Series E, F & G Raised
DiDi invested in Ola’s Series F
Withdrew from Market Investment Acquisition Sale of Operations Partnership
Sources: PitchBook, TechCrunch, Reuters, Bloomberg, The Wall Street Journal and SVB analysis. State of the Markets 19China Focuses Closer to Home
Investment from China to the United States had slowed well before CFIUS grabbed headlines again
in Q1. Certainly this reflects structural changes, such as capital control enforcement, but it’s also a
sign of attractive strategic investment opportunities closer to home.
U.S. Tech Venture Deals with Participation Baidu, Alibaba, Tencent and JD.com’s
from a China-Based Investor Venture Deal Count by Region
15% 30
$100M+ Rounds United States
Sub $100M Rounds Asia Ex-China
25
10% 20
15
5% 10
5
0% 0
2012 2013 2014 2015 2016 2017 Q1'18 2012 2013 2014 2015 2016 2017 Q1’
2018
Sources: PitchBook and SVB analysis. State of the Markets 20China Eyes Tech Self-Sufficiency
China has ambitions to become the global leader in several advanced technology areas, each
requiring significant investment of capital. Through a combination of government support and
domestic enthusiasm, commitments to venture funds topped $50B for the second year in a row.
U.S. Venture Fundraising: 2008–2017 Key Sectors Outlined in “Made in China 2025”
$60B
China Venture Fundraising — Domestic
1) New advanced information technology
China Venture Fundraising — Foreign
2) Automated machine tools & robotics
$50B
3) Aerospace & aeronautical equipment
$40B 4) Maritime equipment & high-tech shipping
5) Modern rail transport equipment
$30B
6) New-energy vehicles & equipment
$20B 7) Power equipment
8) Agricultural equipment
$10B
9) New materials
10) Biopharma & advanced medical products
$0B
2008 2009 2010 2011 2012 2013 2014
2014 2015 2016 2017 Likely to compete with US innovation companies
Sources: Zero2IPO’s PEdata, The State Council of the People’s Republic of China and SVB analysis. State of the Markets 21Prepared for a
Downturn?
State of the Markets 22Dry Powder Tops $100B in China and the West
Years of strong fundraising have venture firms well-positioned to support their best portfolio
companies. Capital available for investment in fervent China suddenly rivals that of the more
established Western world, but would these enormous commitments hold up under stress?
U.S. & European Venture Dry Powder: 2008–2017 China Venture Dry Powder: 2008–2017
$125B $120B $125B $118B
$111B
$95B $94B
$100B $100B
$75B $75B
$53B
$49B
$50B $50B
$24B
$25B $25B
$0B $0B
20082009 2010 2011
2008 2011 2012 2013 2014 2017
2014 2015 2016 2017 20082009 2010 2011
2008 2011 2012 2013 2014 2017
2014 2015 2016 2017
Sources: PitchBook, Zero2IPO’s PEdata and SVB analysis. State of the Markets 23Sovereign Wealth Flows to Innovation
Saudi Arabia and the United Arab Emirates, representing a combined one-sixth of the world’s oil
production, are investing in tech — directly and through the Vision Fund. Other oil-rich nations, like
the Nordics, are similarly diversifying. Could sovereign wealth serve as a fourth wave of capital?
WTI Crude Oil Price: 2008–Q1’18 SoftBank Vision Fund Backers Select Direct Investments in Tech
$150
Others Mubadala
$5B. (UAE).
SoftBank
$125 $28B $15B.
$100 $110M Series D $4.6B Venture
February 2018 February 2018
SoftBank Co-Led Investment Co-Led w/SoftBank
$75 Vision Fund
$93B
$50
$25
Saudi Arabia $5.6B Series G $963M Series D
Public Investment Fund June 2016 March 2018
$0 Contributed $3.5B Co-Led w/Temasek
2008 2011 2014 2017 $45B
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Sources: S&P Capital IQ, U.S. Energy Information Administration, Financial Times, PitchBook and SVB analysis. State of the Markets 24Cheaper Valuations Led to 2016 Acquisition Spree
When public multiples tumbled in early 2016, both financial and strategic buyers pounced. More
than a dozen public-to-private acquisitions occurred before year-end, setting a floor for valuations
and restoring investor confidence in the space that carried through 2017 and into 2018.
Run Rate Multiples for BVP Cloud Index and Strategic and Financial Public-to-Private Deals: 2015–Q1’18
12.0x
BVP Cloud Index (Median) 14 SaaS Acquisitions in 9 Months MuleSoft
Strategic Acquisitions
18.6x
Financial Acquisitions
10.0x
8.0x
6.0x
4.0x
2.0x
0.0x 1/1/15 1/1/16 1/1/17 1/1/18
2015 2016 2017 Q1’18
Sources: PitchBook, TechCrunch, Bloomberg, The Wall Street Journal and SVB analysis. State of the Markets 25Value is in the Eye of the Acquirer
The deals closed following the last (short-lived) downturn are indicative of acquirers’ preferences.
Corporates were willing to pay up for higher growth and strategic value. Private equity preferred
companies closer to profitability and relatively lower revenue multiples.
Select Metrics for U.S. Tech Public-to-Private Acquisition Targets (Middle 50%): April–December 20161
Revenue Growth2 EBITDA Margin3 Run Rate Multiple4 Transaction Value
45% 25% 9.0x $4.5B
40% 20% 8.0x $4.0B
35% 15% 7.0x $3.5B
30% 10% 6.0x $3.0B
25% 5% 5.0x $2.5B
20% 0% 4.0x $2.0B
15% -5% 3.0x $1.5B
10% -10% 2.0x $1.0B
5% -15% 1.0x $0.5B
0% -20% 0.0x $0.0B
Strategic Financial Strategic Financial Strategic Financial Strategic Financial
Notes: 1) These deals are highlighted on the Slide 25 in orange. 2) Most recent quarter’s growth compared to year prior as of
acquisition date. 3) Earnings Before Interest, Taxes, Depreciation and Amortization over the last twelve months as of
acquisition date. 4) Implied enterprise value of transaction relative to most recent quarter’s revenue multiplied by 4.
Sources: S&P Capital IQ and SVB analysis. State of the Markets 26Appendix
State of the Markets 27Report Authors
Bob Blee Steven Pipp, CFA
Head of Corporate Finance Research Manager
bblee@svb.com spipp@svb.com
Bob Blee heads SVB’s Corporate Finance Group, which provides Steven Pipp is a Research Manager based in San Francisco, CA,
commercial banking, lending and guidance to late-stage responsible for capital markets research and data-driven analysis of
corporate technology clients throughout the United States. the innovation economies that SVB serves globally.
Previously, Bob held a variety of roles in SVB’s California and Prior to his research role, Steven managed advisory and valuation
Midwest geographies, most recently heading seed, early and engagements for venture-backed technology companies as part of
mid-stage Infrastructure, Hardware, Consumer Internet and SVB Analytics. Before joining SVB, Steven worked in Minneapolis,
Fintech banking in the Bay Area and Southern California, as MN, as a consultant and entrepreneur in clean energy technology.
well as SVB’s national Mezzanine Lending practice.
Steven earned a Master of Science in Finance from Boston College and
Bob sits on the nonprofit board of the Network for Teaching a Bachelor of Science Business from the University of Minnesota. In
Entrepreneurship (NFTE) and the Silicon Valley Advisory addition, he holds the Chartered Financial Analyst (CFA) designation.
Council of the Commonwealth Club. He is also active with his
alma mater, the University of Illinois.
State of the Markets 28About Silicon Valley Bank For more than 35 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. Silicon Valley Bank is registered in England and Wales at Alphabeta, 14-18 Finsbury Square, London EC2A 1BR, UK under No. FC029579. Silicon Valley Bank is authorised and regulated by the California Department of Business Oversight and the United States Federal Reserve Bank; authorised by the Prudential Regulation Authority with number 577295; and subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. © 2018 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).
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