Category: VC

by Scott Denne

Two months into the new year, 2020’s market for venture exits isn’t shaping up to be a continuation of last year’s evenly distributed liquidity. Instead, it’s looking like a repeat of 2018’s blockbuster-but-unbalanced returns. Intuit’s $7.1bn acquisition of Credit Karma marks the latest in an unprecedented pace of mega-deals for VC-backed vendors, at a time when more mundane exits are as hard to come by as ever.

According to 451 Research‘s M&A KnowledgeBase, Intuit’s purchase marks the third time in two months that a VC portfolio company has been bought for $5bn or more. Put another way, one of every three VC-backed tech vendors that have sold for more than $5bn since the dot-com bubble have done so in the current year. Of course, that’s not entirely due to the generosity of buyers – most targets have taken on far more money than their earlier peers to achieve such outcomes. Credit Karma, for its part, raised about $370m (and another $500m secondary investment from Silver Lake). Plaid and Veeam, the two other venture-backed firms with $5bn M&A exits this year, raised similar amounts.

In 2019, VCs divested 739 companies, the first year they’ve crested 700 since 2016, returning to a typical volume of annual exits and no deal values reaching the $5bn mark. Although there are more exceptionally large exits so far this year, they are more exceptional than ever. For most venture-funded startups, buyers are scarce. Our data shows that 94 such vendors have found buyers since the start of the year, compared with 122 during the same period in 2019. That 22% drop comes as the most prolific startup shoppers are curtailing their purchases.

Of the 10 most active startup acquirers since 2010, only four have printed a purchase this year. Microsoft, for example, hasn’t bought a venture-backed company in four months, while Cisco has been on a six-month drought. Oracle also hasn’t printed such an acquisition in the four months since it bought CrowdTwist, a transaction that ended an 11-month streak without a startup purchase. While vendors like Visa (acquirer of Plaid) and Intuit – neither of which had ever previously spent more than $500m on a startup – reach for the occasional rising star, there’s a distinct lack of interest in less-brilliant assets in venture portfolios.

Figure 1: Annual volume of VC exits ($1bn-plus)

by Scott Denne

A late burst of large deals raised last year’s venture capital exit totals to spectacular from subpar as startup investors leaned on new names for exits. In the final six weeks of the year, five of the companies VCs sold were valued at $1bn-plus, after seeing just one such exit per quarter earlier in the year. And although the deal values jumped at the end of the year, VCs, throughout 2018, saw a steady stream of liquidity from vendors that have recently expanded their startup acquisitions.

According to 451 Research’s M&A KnowledgeBase, venture investors sold $40.4bn worth of tech targets in 2020, a dramatic drop from last year’s record $85.6bn but still finishing as the third-highest annual total since the dot-com days. The final weeks made all the difference. The $13bn combined value of just five acquisitions brought the annual total from just below the $28bn of VC exits from a typical year in the 2010s. And that surge came with little help from the buyers that propped up the exit market earlier in the last decade.

Instead, acquirers that have only recently emerged as major sources of liquidity boosted the annual totals. Here’s a sampling:

Just before Thanksgiving, PayPal spent $4bn for Honey, its largest-ever acquisition and only the second time it’s paid 10 figures for a startup (it bought iZettle for $2.2bn in May 2018).

With barely a week to go in the year, F5 Networks paid $1bn for Shape Security, a deal that followed its March purchase of NGINX for $670m, which was previously its largest acquisition.

After printing a pair of nine-figure startup purchases in 2018, Splunk joined the $1bn club, paying slightly more than that for SignalFx, an early-stage cloud performance-monitoring specialist.

By contrast, the companies that, from 2010-18, bought the most startups – Google, Microsoft, Cisco and Oracle – slowed their activity. As a group, those vendors acquire 31 startups in a typical year, our data shows. Last year they purchased just 20, the fewest ever in the decade, and only Google, with eight deals, including its $2.6bn pickup of Looker, was notably active. To put 2019 into context, Microsoft bought as many VC-funded vendors (five) last year as Palo Alto Networks, a security provider that has only inked 12 acquisitions in its entire history.

Figure 1:

by Scott Denne

Shopify has printed its first major acquisition, spending $450m in cash and stock for 6 River Systems. While the e-commerce technology vendor has inked a handful of tuck-ins, it hadn’t yet bought anything close to this size. In doing so, it joins a streak of new names to deliver significant VC exits this year. Although sales of startups are likely to fall below last year’s record haul, the emergence of new buyers has helped push exits for 2019 above a typical year.

According to 451 Research‘s M&A KnowledgeBase, 60% of venture-backed companies, including 6 River, that sold for $250m or more this year were bought by firms that had never paid that much for a startup. Some of this year’s buyers, including Shopify, Etsy and Uber, are youngish, growing businesses and former tech startups themselves Others are companies from more traditional industries that are new to acquiring tech providers, such as H&R Block with its reach for Wave Financial or McDonald’s, which bought Dynamic Yield in March.

Several others that have printed $250m-plus deals for venture-funded vendors this year only inked their first such purchase in 2018, including Blackstone Group, Palo Alto Networks and Splunk. The latter company printed its first $1bn-plus acquisition just last month, when it scooped up venture-funded SignalFx. Meanwhile, Palo Alto Networks has paid more than $1bn across four startup acquisitions in 2019.

In 2018, new buyers accounted for just 40% of $250m-plus startup transactions. Still, there were far more $250m-plus VC exits last year – 63 compared with 24 so far in 2019. Although the number of significant exits and the total deal value of VC exits are down from last year, that’s hardly an alarming sign for the venture community. In 2018, venture-backed companies brought in a post-dot-com record $86bn via tech M&A. This year, they’re on track to bring in $34bn, higher than all but two years in the current decade (not to mention it’s coming alongside a booming IPO market), and the $9.5bn coming from new acquirers has played an outsized role in venture liquidity this year.

Figure 1

by Scott Denne

As we noted in a recent report, the number of $1bn-plus venture exits has plummeted from last year’s high because so far, most of the tried-and-true startup acquirers are siting on the sidelines this year. Still, the total amount paid to acquire startups is tracking for an exceptionally high finish, and that’s coming as several companies print their largest acquisitions of venture-funded companies this year.

The most active acquirers of venture-backed startups have been largely inactive this year, leaving it to new buyers to write the largest checks. And although this year’s pace is behind last year’s record of $85.6bn, 2019 is on track for an exceptionally high $37.8bn.

The most frequent acquirers – Alibaba, Cisco Systems, Microsoft, SAP, among others – drove last year’s record sales of VC companies. According to 451 Research’s M&A KnowledgeBase, none of those buyers have paid nine figures for a startup this year. In fact, only one of the 10 most frequent buyers of VC companies over the last decade (Google) has printed a $100m-plus startup purchase in 2019.

This year’s largest deals, by contrast, have come from acquirers that are spending more on startups than they ever have before.

In the year’s largest exit, Uber, just ahead of its IPO, printed its first-ever 10-figure deal, paying $3.1bn for Careem, a Middle Eastern ride-share company.

Carbonite and Fortive both printed their first $500m-plus startup acquisitions.

F5 Networks did the same when it bought NGINX, its first acquisition of any kind in five years.

Palo Alto Networks has scaled up its deal-making in recent years, crossing the $500m mark for the first time with its purchase of Demisto.

Of all the organizations to pay $500m or more for a VC portfolio company this year, only Google had done so in a previous year, according to the M&A KnowledgeBase. Alphabet, Google’s parent company, is no stranger to acquiring startups – our data show it has acquired more (104) than any other buyers since the start of the decade. But its $2.6bn Looker acquisition was different than the deals it’s done previously. It’s the company’s first $1bn-plus startup purchase since 2014, and the first time it’s ever paid such an amount for an enterprise software business (venture-backed or otherwise).

by Scott Denne

Although unlikely to match last year’s record haul in dollar terms, the liquidity in this year’s VC exit market is more evenly distributed. Through the first half of 2019, more venture-backed companies are on pace to exit than in any year since 2016, shaking off a years-long decline in exit volume. At the same time, blockbuster deals are trending down as many of the venture community’s most reliable buyers have stayed out of the market and some of the most promising vendors opt for public listings.

According to 451 Research’s M&A KnowledgeBase, 359 venture-funded companies were acquired through the first half of 2019, a pace that’s up 15% from last year, which was the lightest year for venture exits, by volume, since 2010. So far, sales of VC-backed tech vendors fetched just $18.9bn, compared with $85.6bn in all of 2019. Although exits are set to pull in less than last year, sales of companies from venture portfolios, if the current pace holds, would generate more than all but two years in the current decade.

Even as more deals print, the typical value of those transactions holds steady from last year’s level. The median deal value of a 2019 venture exit (via M&A) stands at $100m through the first half of the year, slightly down from where it finished last year, and far higher than all other years this decade. It’s a decline in big-ticket acquisitions that’s weighing on this year’s total deal value. So far, only two venture-backed vendors have sold for more than $1bn, compared with 13 in all of last year. Put another way, if past is precedent and 2019 ends with a total of four $1bn VC company sales, there will have been as many $1bn-plus exits in 2019 as there were $5bn-plus exits a year earlier.

Still, it’s not likely that acquirers have lost interest in inking substantial purchases of VC-backed targets. After all, the rise in the stock market through this year has bolstered valuations of many would-be buyers and should make them more willing to do big prints. Instead, venture-backed startups have more exit options and are getting more expensive. The multiple Google paid in its $2.6bn pickup of Looker speaks to that (subscribers of the M&A KnowledgeBase can see that multiple here). Instead of selling, many of the most attractive targets are eyeing the public markets, where, as we discussed in a recent report, many new issuers are fetching multiples north of 40x trailing revenue.

by Brenon Daly

The total number of VC-backed startups hitting the exit so far this year has surged to a three-year high. But most of those deals are at the lower end of the market, according to 451 Research’s M&A KnowledgeBase. Actual unicorn sightings are extremely rare.

In fact, the M&A KnowledgeBase lists just one sale of a venture-backed company for more than $1bn so far in 2019. For comparison, last year the venture industry averaged one unicorn-sized exit every single month. The shift from last year’s ‘fewer – but bigger – deals’ for VCs to this year’s ‘more deals, but far fewer big ones’ could dry up billions of dollars of liquidity for venture firms.

Even excluding last year’s stampede of unicorns, our data shows that the previous half-decade (2013-17) averaged slightly more than four big $1bn+ exits each year for VC portfolio companies. Right now, 2019 is on track for half that number. And yet, the current number of VC-backed startups that have achieved billion-dollar valautions stands at a record high, roughly 10 times more startups than when Aileen Lee initially coined the term ‘unicorn’ in 2013.

Why haven’t venture-backed startups been realizing the same big paydays in 2019 as they have in recent years? Part of the answer is that the IPO market has been more welcoming than in years past, supplying exits this year to some of the most valuable private companies, including Uber, Lyft and Pinterest. (Don’t forget that three of the $1bn+ exits for VCs last year came when startups were snatched out of IPO registration.)

While dual-tracking may be slightly influencing the supply side of the M&A equation for venture startups, we would suggest that a significant shift in the other side (demand) is the main reason for this year’s drop-off. Simply put: The conventional buyers – the tech industry’s well-known names that tend to pay top dollar when they reach into VC portfolios – just aren’t doing deals like they once did.

To illustrate, the M&A KnowledgeBase indicates that SAP, Cisco and Microsoft all inked $1bn+ acquisitions of startups last year, paying roughly 20x in those transactions. So far in 2019, however, that big-cap trio has printed only small tuck-ins.