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.

A monkey riding a bull

by Brenon Daly

Already valued at about $2bn in the private market, SurveyMonkey held that ‘double unicorn’ valuation as it debuted in the public market. The company priced its upsized offering above the expected range, and watched the freshly printed stock jump about 50% on the Nasdaq. Yet even with all that bullishness, the IPO was more about value confirmation than value accretion.

Still, the online survey provider does enjoy a rather healthy valuation. With roughly 125 million shares outstanding (on a nondiluted basis), Wall Street is valuing SurveyMonkey at about $2.25bn. That’s roughly nine times the 2018 revenue that we project for company. (Our math: So far this year, SurveyMonkey has increased revenue about 14%. Assuming that rate holds through the second half of this year, 2018 sales would come in at about $250m.)

In the IPO, the company raised $180m plus another $40m from a separate direct sale to Salesforce Ventures. That goes on top of the roughly $1bn that the company had previously raised in debt and equity. The company’s main backer, hedge fund Tiger Capital Management, still owns about one-quarter of the company. (In addition to being the largest shareholder of SurveyMonkey, Tiger is also its largest customer, according to the company’s prospectus.)

Having probably taken in all the financing it could reasonably expect to collect as a private company, SurveyMonkey might well look at today’s IPO as a necessity. (It will be using $100m of the proceeds to pay off its debt.) The fact that Wall Street investors received the dot-com survivor so warmly not only splashes a bit of liquidity in the 19-year-old company, but may have other companies of its scale and vintage also give a closer look at the public market. As everyone on Wall Street knows, you always want to sell into demand.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

VC is looking easy this year

Halfway through the year, venture capitalists have already reaped a near-record amount of value from their portfolio companies. In any dissection of venture exits, a large deal or two can drive the annual total. This year is no exception, as the second-highest-priced VC exit since the dot-com days printed in May. Still, the rise in value isn’t limited to the high end of the market.

According to 451 Research’s M&A KnowledgeBase, VCs globally have sold $46.4bn worth of tech portfolio companies through the first half of the year. That’s already 45% higher than the amount from all of last year’s exits and just shy of the record for annual VC-backed sales – $50bn in 2014. Facebook’s $19bn reach for WhatsApp, the largest acquisition of a venture-funded company, led that year’s totals. Embedded in this year’s figure is the second-largest, Walmart’s $16bn purchase of Flipkart.

Still, this year’s record-setting pace isn’t propped up by a single transaction. Since 2002, only four VC portfolio companies have sold for more than $5bn – three of them came in the first half of this year. Even looking at the VC exit market without those rare $5bn-plus exits, this year’s first half generated more VC exit value than the first half in 15 of the past 16 years. In fact, more companies than ever are benefiting from higher prices. The running median value of a venture exit this year, at $123m, sits more than twice as high as last year’s median of $56m – a number that’s roughly in line with values between 2014 and 2016.

Many of the reasons for the surge are the same as those driving the broader tech M&A market toward another record, including increased activity among strategic acquirers buoyed by a tax windfall, a pageant of IPOs, the continued rise of private equity, and other trends that we’ll discuss in a webinar on Tuesday (more info here). Amplifying those trends, VCs benefit from a widespread fear of changes wrought by new technologies.

According to 451 Research’s Voice of the Enterprise: Digital Pulse, 46% of IT decision-makers predicted that digital technology would have a large impact on their companies’ markets over the next five years, compared with just 14% who forecast little or no impact. Those anticipated changes are playing out not just in the valuations, but in the type of deals getting done. Case in point: the $1.9bn pickup of oncology trial software developer Flatiron Health by Roche, a pharmaceutical firm that had never spent $100m on an information technology provider. Or Microsoft’s new tack in building software developer relationships via its $7.5bn acquisition of GitHub.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

What to look for in tech M&A in 2018

Contact: Brenon Daly

As we look back on 2017 and ahead to 2018, 451 Research has published its annual forecast for tech M&A, highlighting the trends that we expect to shape deal flow and the markets that we think will see much of the activity. The 2018 Tech M&A Outlook – Introduction serves as an overview of the broad M&A market, setting the stage for the upcoming publication of our comprehensive report that features analysis and predictions for eight specific IT markets on what deals are likely in 2018.

The full report, which we think of as an ‘M&A playbook’ for the enterprise IT market, has insightful forecasts for activity in application software, information security, mobility and other key sectors. The 80-plus-page 2018 Tech M&A Outlook report will be published at the end of January. It will be available at no additional cost for subscribers to 451 Research’s M&A KnowledgeBase Professional and Premium products, and will be available for purchase for 451 Research clients and others that don’t subscribe to our M&A KnowledgeBase products. (If you’re interested in purchasing the full 80-plus-page report, contact your account manager or click here.)

In the meantime, our introduction provides insights on some of the overall dealmaking trends that are also likely to shape activity and valuations in sector-specific transactions. Key highlights in our overview of the broader M&A market include:

  • After tech M&A spending in both 2015 and 2016 topped a half-trillion dollars, what happened that knocked the value of deals in 2017 down to just $325bn?
  • Many of the tech industry’s biggest buyers printed only half as many deals as they have in recent years. Is that the new pace of M&A at these serial acquirers, or will they rev up again in 2018?
  • The pending tax overhaul will likely add billions of dollars to the treasuries at major tech vendors. Why don’t we think that will necessarily lead to more M&A? If they don’t spend it on deals, what are tech companies going to do with the windfall?
  • Which tech markets are expected to see the biggest flow of M&A dollars in the coming year? Enterprise security tops the forecast once again, but what about emerging cross-sector themes such as machine learning and the Internet of Things?
  • How did private equity (PE) move from operating on the fringes of the tech industry to become the buyer of record? PE firms accounted for an unprecedented one out of every four tech transactions last year. Why do we think their share of the market will only increase?
  • VC portfolios are stuffed, as the number of exits in 2017 slumped to its lowest level since the recession. What challenges loom for startups and the broader entrepreneurial community without the return of billions of dollars from those investments?
  • For startups, will venture capital be flowing freely in 2018? Or will the polarized VC market (fewer rounds, but bigger rounds) continue this year?
  • Despite nearly ideal stock market conditions, why don’t we expect much acceleration in the tech IPO market in 2018? What needs to happen – to both supply and demand – for the number of new offerings to take off?

For answers to these questions – as well as other factors that will influence dealmaking in 2018 – see our just-published 2018 Tech M&A Outlook – Introduction.