Another strong year of exit activity was seen across the venture capital (VC) industry in 2017 with $67 billion exited across 1,265 deals, according to the 2017 PitchBook VC Liquidity Report. Although this is the third consecutive year exit counts have declined, the maturing venture environment across North America and Europe coupled with generous valuations, allowed for the proliferation of larger exits. In 2017, exits over $100 million comprised just over a third of total exit counts, while these transactions made up 88.7% of total exit value. While larger deals have always had an outsized effect on VC exit value, the relationship continues to be more pronounced.
For unicorn-valued companies, 2017 was a rebound year when it comes to liquidity events – reaching a decade-high of 24 exits. Private equity (PE) sponsors continue to be a prominent source of liquidity for VCs, as buyouts made up 18.5% of all exits. On the other hand, acquisitions declined for the third consecutive year, sliding to 72.5% of completed transactions. In a year that started off wary around the IPO market, it turned into a strength for the VC community, with $13.5 billion raised across 114 companies – representing a 203% and 30% increase in value and quantity, respectively. More interestingly, 2017 brought a host of alternative VC exit options to the forefront including Social Capital and Hedosophia’s formation of a special purpose acquisition company (SPAC) and Spotify’s direct listing.
“While 2017 began with uncertainty and skepticism surrounding the IPO market, specifically for unicorns, the year ended favorably for the VC community,” said Cameron Stanfill and Joelle Sostheim, analysts at PitchBook. “Looking forward, 2018’s IPO prospects appear strong with a substantial pipeline of mature late-stage companies, including 53 newly-minted unicorns – though volatility in the public market could pose a challenge.”
VC Exit Environment Accommodates Outsized Exits
In 2017, the number of exits that eclipsed $1 billion was in-line with the last four years, but an open IPO window for highly-valued companies brought the number of unicorn companies exiting to a decade-high of 24. This figure surpasses the tally in 2014, which held the record for unicorn exits, aggregate exit count and value. More importantly, this trend marks a positive signal for the capacity of the exit environment to facilitate outsized exits. The ability for the broader exit market to accommodate these exits is critical as the inventory of VC-backed aging unicorns swells – 18 current companies achieved their one-billion-dollar valuation at least four years ago. Moreover, this phenomenon encourages the large, mature VC-backed businesses to delay exits beyond the normal VC lifecycle. Yet, investors need liquidity – enabling alternative exit options to combat this “private-for-longer” strategy. SoftBank’s nine-billion-dollar investment into Uber serves as an extremely large-scale example, but nonetheless, provided liquidity to some of their earliest investors from the start of the decade.
Costly Acquisition-Targets Pave the Way for Increased PE Involvement
Acquisitions declined for the third consecutive year in 2017, as deal count slid 15.4% and volume decreased 21% from the previous year. While there were 3,538 acquisitions of VC-backed companies completed between 2014 and 2016, 2017’s decline may be a product of corporations focusing on integrating new companies into their operations. On the other hand, as valuations of venture-backed companies continues to rise – these transactions are becoming costlier, encouraging buyers to wait for more favorable prices before ramping up activity. Financial sponsors picked up acquirer’s slack, as buyouts shot up to 18.5% of all exits in 2017, and volume doubled to $8.1 billion. Again, the “private-for longer” trend comes into play here as these mature, venture-backed companies present appropriately mature and profitable opportunities to fill PE investors’ pipelines. Buyouts may also be favorable to founders, as they can circumvent the arduous alternative of operating as a public company in favor of staying private.
Large Tech Offerings Lead 2017 IPO Value
2017 enjoyed a healthy uptick in IPOs. The market saw over $13.5 billion raised across 114 companies. Public offerings of venture-backed companies increased 203% in volume, and 30% in quantity from the previous year. Demand for large tech offerings emerged in 2017, with six outsized tech IPOs raising more than $500 million – representing more than 48.2% of total IPO deal value. The median time to IPO following a company’s most recent financing increased to approximately 1.4 years, and the median years from founding to exit remained at a high point of 9.5 years. Additionally, the median pre-IPO valuation reached $167.6 million, a 39% increase from 2016. These outsized liquidity events affect investors differently, however. Although these large exits provide early investors strong returns, backers closer to the exit may not receive substantial gains, as growth and value appreciation slows for larger, more mature companies. Snap, for instance, saw a massive appreciation in its valuation from its Series A round to Series F round after four years of rapid growth. However, its IPO valuation depreciated from the valuation received during its Series F round amidst reports of decelerated user growth, and similar product offerings from competitors.
Additional coverage in this report includes:
VC Exits by Type; Acquisitions, Buyouts, and IPOs
VC Acquisitions by Sector
Spotlight: Alternative Exit Opportunities