Shopify and other new buyers check out VC portfolios

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 Researchs 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

A rare trip into rarified air

by Brenon Daly

Symantec’s blockbuster $10.7bn divestiture of its enterprise security business to Broadcom marks a rare trip into rarified air for the information security (infosec) M&A market. Through the first seven-plus months of 2019, 451 Researchs M&A KnowledgeBase shows not a single deal in the segment valued at more than $1bn.

Obviously, the unusual carve-up of Big Yellow blows past that threshold. But setting aside this transaction, which we would very much describe as a one-time deal, a couple of trends are playing out in the infosec market that may make it tough to see many more of those three-comma deals coming for the rest of 2019. We suspect that this year’s total will end up looking up at the three separate billion-dollar transactions we tallied last year.

Helping to keep a lid on deals at the top end of the infosec sector right now are factors including:

Several of the industry’s largest vendors appear unlikely to pursue big-ticket transactions. In some cases, that’s due to internal upheaval (e.g., Symantec, which has announced five billion-dollar acquisitions in the past 15 years). In other cases, it’s due to a likely period of digestion (e.g., Palo Alto Networks, which has dropped $1.6bn in a half-dozen high-valuation deals over the past 18 months).

After only recently starting to print big purchases, private equity firms have slowed their activity at the top end of the market. That move down-market comes after buyout shops have been behind significant infosec take-privates in the past two years, including Barracuda and Imperva.

And most notably, VC dollars have replaced M&A dollars in the ‘unicorn universe.’ In just the past four months, Auth0, SentinelOne, Cybereason and Sumo Logic have all landed funding rounds that value the infosec startups at more than $1bn, according to the premium version of 451 Research’s Private Company Database.

As long as startups only have to give up a portion of their equity to VCs (rather than full ownership to an acquirer), funding will likely be the option of choice for popular infosec startups. Of course, taking money now at such an elevated level assumes that billion-dollar buyers will return at some point to provide big exits. That may well be the case, but it’s a pretty high-stakes gamble nonetheless.

New names propel venture exits

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).

Venture exits abound but shrink

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.

PE, not just VC, joins the IPO parade

by Brenon Daly

The tech IPO parade continues, but with a twist. Rather than having its journey to Wall Street backed by truckloads of venture dollars, the first enterprise-focused company in the second half of 2019 to put in its S-1 is coming from a buyout portfolio. Dynatrace is a private equity-backed spinoff, not a VC-backed startup.

The planned offering by Dynatrace would be the latest move in a rather unconventional journey to the public market by the application performance monitoring (APM) vendor. Founded far from Silicon Valley, Dynatrace got its start in the sleepy Austrian town of Linz in 2005, taking in only $22m in funding before exiting to Compuware in July 2011 for $256m, or 10x invested capital.

Compuware itself was taken private by buyout firm Thoma Bravo three years later for $2.5bn, which, at the time, represented Thoma’s largest single transaction. Shortly after, Thoma spun off Dynatrace from its one-time parent and consolidated its new stand-alone APM holding (Dynatrace) with an existing one (Keynote Systems, which Thoma took private for $395m in June 2013).

After all that addition and subtraction, Dynatrace now looks to debut on Wall Street. That’s a trick that rival AppDynamics wasn’t able to pull off because Cisco Systems snapped the venture-backed company out of registration. Assuming Dynatrace does make it public, it would mark the first IPO in the fast-growing sector since New Relic went public in December 2014. (New Relic currently sports a $5bn+ market cap.)

But it certainly won’t be the last. Dynatrace’s sometime rival Datadog, which has raised $148m in venture backing, is thought to be eyeing an IPO of its own. (Subscribers to the Premium edition of the 451 Research M&A KnowledgeBase can see our full profile of Datadog, including our proprietary estimates for revenue for the past two years.) Meanwhile, subscribers to 451 Research’s Market Insight service can look for our full report on Dynatrace’s proposed offering on our site later today.

A single unicorn sighting

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.

2019 Tech M&A Outlook: Introduction

by Brenon Daly

Each January, we look back on deal flow over the previous year and look ahead at what we expect in the coming year. Our Tech M&A Outlook: Introduction provides a broad overview of acquisition activity in the tech market and the trends that shaped – and will shape – the multibillion-dollar tech M&A market. A few of the insights from the report include:

Both strategic and financial acquirers printed a record number of billion-dollar deals in 2018, with their combined pace topping two big-ticket transactions announced every week last year, according to 451 Research’s M&A KnowledgeBase. Microsoft, Salesforce, SAP, Adobe and IBM all inked billion-dollar acquisitions last year, after not one of the tech giants announced a blockbuster print in 2017.

With its broad applicability for buyers across the tech landscape, machine learning (ML) cemented its standing as the fastest-growing trend in the tech M&A market. The number of deals has increased roughly 50% every year since the start of the decade, our data shows. And no slowdown is expected in 2019, since bankers told us they have more ML transactions in their pipelines than anything else.

VC has turned into an industry characterized by ‘fewer, but bigger.’ That’s true in funding as well as exits. The M&A KnowledgeBase tallied the sale of just 603 startups in 2018, the second-fewest exits in the past half-decade. Proceeds from those deals, however, smashed all records. Last year’s total of $83bn in announced or estimated deal value almost eclipsed the total for the three previous years combined.

Additionally, we look at the prevailing trends in M&A pricing; the unprecedented activity of private equity that’s reshaping the tech landscape; and what the outlook is for the other exit, IPOs.

The overview serves as an introduction to our full, 100-page report that covers the outlook for M&A activity in six key enterprise IT markets, including application software, IoT and cloud. The full report, which will be available next week, is included in all subscriptions to 451 Research’s M&A KnowledgeBase, and is also available for purchase.

An unexpected exit from Sand Hill Road

by Brenon Daly

There’s a new exit off Sand Hill Road that’s proving increasingly popular for startups. Rather than following the well-worn path that leads into another venture portfolio, startups are taking an unexpected turn into private equity (PE) holdings at a record rate. For the first time in history, a VC-backed startup in 2018 was more likely to sell to a PE buyer than a fellow VC-backed company, according to 451 Research’s M&A KnowledgeBase.

Last year was a stunning reversal from when ‘inter-species deals’ were the norm. In 2015, for instance, the M&A KnowledgeBase shows almost three times as many VC-to-VC transactions as VC-to-PE transactions. But with ever-increasing amounts of cash to put to work, PE firms have started reaching into VC portfolios much more frequently and aggressively.

The M&A KnowledgeBase shows that buyout shops, which once operated on the diametrically opposite end of the corporate lifecycle from VCs, are now providing almost one out of four venture exits. They are doing this by bolting on startups’ assets to their ever-increasing number of existing portfolio companies, as well as by recapping startups, or buying out an existing syndicate of venture investors.

Altogether, PE firms have doubled the number of VC-backed deals over the past three years. That buying group has increased its startup purchases every single year since 2015, while the number of VC-to-VC transactions has fallen every single year during that period.

Those diverging fortunes have pushed buyout shops’ share of VC exits to an unprecedented 23% in 2018, up from roughly 10% at the start of the current decade, according to the M&A KnowledgeBase. So for a startup looking to sell itself in the coming year, it’s probably more likely to go to a company owned by Silver Lake rather than Greylock, or KKR rather than NEA.

VCs piling up chip deals

This year’s surging M&A market has brought relief to a tech sector that’s long struggled to find exits. With today’s announcement that Cisco is acquiring venture-backed Luxtera for $660m, venture capitalists have realized more value from their semiconductor investments than any time since 2013. In a reflection of the broader market, the return of strategic acquirers has boosted the sales of chip startups.

As 2018 heads toward a close, buyers have spent a collective $1.4bn on purchasing semiconductor startups from venture portfolios, compared with just $1.8bn in the three previous years combined. The acquisition of Luxtera goes a long way toward boosting this total. According to 451 Research’s M&A KnowledgeBase, the deal is the largest purchase of a VC-backed chipmaker since the dot-com bubble burst. (Neither that record nor the annual totals include acquisitions of public companies that previously raised venture capital.)

That Luxtera’s exit marks a record speaks as much to the dearth of liquidity for chip startups as it does to the target’s accomplishments. In the face of rising development costs, VCs have long shied away from chip investments and acquirers have come to depend on product development more than M&A for incremental improvements. Most of the dealmaking among semiconductor vendors in recent years has been large consolidations, rather than midmarket acquisitions.

Still, there’s been some relief from the paucity of exits this year. Prior to Luxtera, Cisco, a frequent buyer of software vendors in recent months, hadn’t acquired a semiconductor business in nearly three years. The same goes for Skyworks, which provided VCs with the third-largest exit in the category when it shelled out $405m for Avnera in August – it was the acquirer’s first purchase in more than 30 months. And Intel picked up a pair of chip startups this year after a 16-month hiatus from semiconductor M&A.

VC exits soar for some

by Scott Denne

With its $8bn purchase of Qualtrics earlier this week, SAP helped push venture exits into the nosebleeds. About seven weeks remain in the year and the total value of acquired startups has already smashed the previous post-dot-com record. Yet the spoils aren’t evenly distributed. Those startups getting sold are often commanding a premium, although most aren’t getting sold at all.

According to 451 Research’s M&A KnowledgeBase, venture funds have sold a collective $75bn worth of tech vendors, 50% more than the previous record of $50bn. Rising prices, rather than deal volume, are driving that total. Since the dot-com days, VCs have sold five private companies for more than $5bn. Four of them have traded this year. Moreover, 11 have sold at $1bn-plus, more than the previous two years combined.

The trend isn’t limited to the big-ticket transactions. Overall, the businesses that are getting sold are selling for more. The median price tag for a venture-funded vendor stands at $123m this year, well above the typical $55-65m for the most recent years. Demand from acquirers isn’t the only reason for rising startup prices. Venture-backed companies are also raising more and bigger rounds, staying private longer and, therefore, fetching more when they do sell. Still, the number of venture-backed vendors to find a buyer this year – 520 so far – is on pace to be the lowest since 2009.

The perception that there’s a major tech-driven transformation afoot has sparked many of this year’s exits. Indeed, the largely untried idea of combining ERP, CRM and HR data with customer and employee sentiment drove SAP’s Qualtrics purchase. According to 451 Research’s Voice of the Enterprise: Digital Pulse report, 46% of respondents told us that they expect digital technology to highly impact their organization’s industry over the next five years. Whether acquirers view the looming transition as an opportunity or a challenge, it’s pushing them toward the perceived winners in each category and creating a willingness to pay up. There doesn’t appear to be much of a prize for second place.