Is VC Still

A Thing?

Mark Suster
@msuster

Chang Xu
@_changxu

!1
Image Credit:
Freepik
 Last year, the
discussion was
how ICOs were
going to wipe
out VC.

!2 Image Credit: Pexels

 And we know
some founders
eschew venture
capital.

3 Image Credit: Pexels

 Some fear that
SoftBank, Sequoia
and sovereign
wealth funds may
eat VCs alive.
4 Image Credit: Pexels
 t a k e a
Le t ’s
lo o k a t
clo s e r
c t u a ll y
h a t ’s a
w i n g .
ha p p e n

!5 Image Credit: Pexels

 We all know that startup …and VC funds are raising
funding is up massively… significantly more capital.

$131B
$55B

$34B

$83B $34B

$29B

2006 2008 2010 2012 2014 2016 2018 2006 2008 2010 2012 2014 2016 2018

6 Source: Pitchbook NVCA Venture Monitor 4Q’18

 Some LPs express
concerns about valuation
creep or too much capital.

!7
 But let’s peel back the
onion to see what’s
really happening.

8 Image Credit: Freepik

 The number of Pre-Seed deals (<$1M) backed by VCs skyrocketed (600%) but
has cooled off by 1/3rd over the past three years.

3,543
3,374
Cooled off
by >1/3

>600% 2,144

488

US VC Number of Deals under $1M

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

9 Source: Pitchbook NVCA Venture Monitor 4Q’18

 The exact same phenomenon happened in the Seed market ($1-5M).

3,315 Down ~20%

3,104
2,699

>300%

1,036

US VC Number of $1-5M Deals

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

10 Source: Pitchbook NVCA Venture Monitor 4Q’18

 And the number of Micro Funds raised has followed in lock step.

181
181 Down 30%

2.2x 129

83

# Funds and Capital Raised ($) for <$100M Funds

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

11 Source: Pitchbook NVCA Venture Monitor 4Q’18

 What is going on
at the seed stage?

!12 Image Credit: Pexels

 For one thing, traditional Series A venture capital hasn’t meaningfully increased
investment pace over the past decade.

US VC Number of $5-10M Deals

1,118
4%
CAGR

687

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

13 Source: Pitchbook NVCA Venture Monitor 4Q’18

 Series B deal volume also has been fairly constant over the past decade.

US VC Number of $10-25M Deals

1,103
5%
CAGR

643

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*

14 Source: Pitchbook NVCA Venture Monitor 4Q’18

 As a result, we see a rise in the “Seed Extension” deals feeding into the Series A
pipeline and companies staying in seed phase for longer.

Number of Seed Extension Rounds Time to Series A

Median years from Series Seed to A

1.6
1.4
1.2 1.2 1.2
1.1
0.9
69 0.8

52
45
39
28

9 8 11

Pre-2012 2012 2013 2014 2015 2016 2017 2018 Pre-2012 2012 2013 2014 2015 2016 2017 2018

15 Source: Cendana Capital portfolio company data (with permission)

The Series A and B part of the market is very similar to how it was 15 years ago—
except with a 3x bigger top end of the funnel.

THEN NOW

Top end of
Angel / pre-seed
Angel / Seed the funnel is
Seed funds now 3x larger
Series A Series A
funds funds

Series B Series B
funds funds

Bottom end of the funnel haven’t changed much

16 Source: Upfront analysis

 While it’s true that there has been valuation creep for Series A and B…

US VC Median Pre-Money Valuation ($M) by Year

$60M
Series B

$45M

$30M

Series A
$15M

$0M
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*

17 Source: Pitchbook NVCA Venture Monitor 4Q’18

 …part of fund size increases has been about maintaining ownership levels.

US VC Series A Round Median Ownership

40%
35%+

29%
30% 28%
25% 26%
25%

20%

10%

0%
1990s 2014 2015 2016 2017 2018

Methodology: For 2014-2018, divided Median Deal Size by Median Post-Money Valuation for Series A deals
18
Source: Pitchbook data for 2014-2018, Upfront analysis
 For the best VC funds,
the upside case has
never been bigger.
Let’s zoom out and
I’ll explain.

!19 Image Credit: Pexels

 We all know that capital going to startups has increased significantly in the past
five years (by 300%).

US VC Capital Invested by Deal Size ($B)

$131B

$83B $77B $83B

$71B
$48B

2013 2014 2015 2016 2017 2018

20 Source: Pitchbook NVCA Venture Monitor 4Q’18

 Most of this capital increase, though, falls into three buckets that can be called
“mega-rounds.”

US VC Capital Invested by Deal Size in 2018 ($B)

$20B $40B $21B

Total Total Total
$61B in deals
over $100M

$81B in deals
$50- $100M over $50M
$1B+
100M -1B

21 Source: Pitchbook NVCA Venture Monitor 4Q’18, Upfront analysis

 What really happened is that the IPO window was pushed out 5+ years
for the best companies and the dollars have shifted from public to private.

$2B++
$ Raised Prior to IPO

$50M

Old IPO New IPO

6-8 years 10-12 years

22
 In the past, the best companies IPO’d in 6-7 years from inception. As a result the
value captured was all in the public markets.

Companies Founded Before 2000

Number of 3 5 6
Years Private

VC $ Raised $7M $9M $65M $35M

Prior to IPO

Last Private
Market Valuation $23M $60M $355M $100M

23 Source: Pitchbook
 But now the goalposts have moved and the best companies are staying private twice as
long. This is a massive opportunity for venture firms that have ownership and pro rata rights.

Companies Founded Since 2006

Number of
Years Private
9 10 11 12

VC $ Raised
Prior to IPO $19.9B $4.4B $1.2B $4.9B $1.7B $370M

Last Private
Market Valuation $72B $31B $7B $15B $10B $1.5B

Note: Due to limited data set, included high-profile tech companies that are expected to IPO in 2019 (Uber, Lyft, Airbnb, Slack)
24
Source: Pitchbook
 If Amazon, Google and Salesforce had each stayed private for 12 years, an
additional $197 billion in value creation could have occurred pre-IPO.

$830B

Market Cap Appreciation – IPO to 12 Years Post-Inception

$622.5B

Year 12
$415B

$18B
$207.5B

FOUNDED IPO $102B

$0B

-4

-3

-2

-1

+1

+2

+3

+4

+5

+6

+7

+8

+9

3
99

04

18
+1

+1

+1

+1
19

20

20
$830B

$829B
$622.5B

$415B
Year 12
$207.5B
$162B
FOUNDED IPO
$0B
98

04

18
-5

-4

-3

-2

-1

+1

+2

+3

+4

+5

+6

+7

+8

+9

3
+1

+1

+1

+1
19

20

20
$830B

$708B
$622.5B

Year 12
$415B

$17B
$207.5B

FOUNDED IPO
$0B
94

97

18
-2

-1

+1

+2

+3

+4

+5

+6

+7

+8

+9

0
+1

+1

+1

+1

+1

+1

+1

+1

+1

+1

+2
19

19

20
25 Source: Yahoo Finance
 Here is the “private IPO” phenomenon in numbers.

Total Mega-Round Count

198
200
Mega-rounds
($100M+ financings)

150
125
109 104
100 82 79
IPOs
79 85
50
58
43

0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

26 Source: Pitchbook NVCA Venture Monitor 4Q’18

 54 new companies raised at more than $1 billion valuation.

Number of Unicorn Births

54

42 43

34

22

11 12
9
3 4 4

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

27 Source: Pitchbook Unicorn Report 2018, Pitchbook analysis

 Just five years ago, $100M+ rounds accounted for just 13% of financings as
opposed to 47% in 2018. Traditional Venture Capital has only grown 14% per year.

US VC Capital Invested by Deal Size ($B)

$131B

GROWTH
61 Mega-rounds
≥$100M

60%
CAGR
$48B
6
70 VENTURE
14%
<$100M rounds
41 CAGR

2013 2014 2015 2016 2017 2018

28 Source: Pitchbook NVCA Venture Monitor 4Q’18

 The private IPO trend seems to have gathered steam in 2014.

US Mega-Round ($100M+) Financings by Year

198

109 104
82 79

46
36
25 28
20
14

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

29 Source: Pitchbook NVCA Venture Monitor 4Q’18

 So in reality it seems the private capital market is now three fairly distinct
categories.

Seed Capital Venture Capital Growth Capital

The Start Scale or Bust Private IPOs

20% of deals drive

80% of returns

30
So while time-to-liquidity for VCs has been pushed out, the best VCs (and LPs) are compensated by
capturing more of the upside. Pro rata rights have become much more valuable in the best deals.

Structural Changes to Defend Ownership Through Exit

Which is why many

stage funds have set up
Growth Funds companion funds
Series A 20% Opportunity Funds
to defend their
Target
Ownership
SPVs
ownership through exit
@ Exit Seed 10%

31
 So no, Venture Capital is
not dead. Here are some
thoughts on why the
next decade should see
even more upside.

!32 Image Credit: Freepik

In 1999, the US VC industry raised $53 billion for a nascent Internet population. 20
years later, we have 77% of US and 56% of the world online with $55 billion raised.

US Internet Users (Millions) Global Internet Users (Millions)

250 4,200
230

2,800

100

250

1999 2013 2018 1999 2013 2018

33 Source: World Bank; Internet World Stats; Pitchbook; Industry Ventures

 Connection speeds in 2018 is a whopping 400 times faster than that in 1999.

1999 2014 2017

United States 50
(Avg Speed, Mbps) Kbps 11.1 18.7
Dial Up

34 Source: Akamai’s State of the Internet, Statista

 Nearly everybody now has a computer in their pocket.

Smartphone Penetration 1999 2013 2017

United States N/A 56% 72%

Global N/A 27% 66%

35 Source: Newzoo, GSMA

 Because we’re all connected—when concepts work, they scale much faster and
become much more dominant than at any point in human history.

Monthly Active Users (Millions)

2,500

2,000

1,500

2,271
1,000

1,189 1,057
500 1,000
Not in existence 130
0 0 0 0 0 33
33 130 218 236 186 326
0
1999 2013 2018

36 Source: Upfront analysis

 And with everybody’s credit cards or banks now connected to tech platforms,
we’ve eliminated most purchase friction. We’re one tap away from buying online.

Total Active Users (Millions)

700

525

*
350

175

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

*Amazon user data is estimated as straight line from IPO (1997) to 2018 reported values
37
Source: Upfront Analysis, PayPal, Loup Ventures, BigCommerce
Most industry analysts haven't even begun to comprehend what an enormous shift 5G
speeds will bring. We anticipate enormous creative destruction and company creation.

5G

4G
3G
2G

4 25
<1
Mbps Mbps
Mbps ?

Note: Represented AT&T’s average 3G and 4G download speed. 5G networks have the potential to be significantly faster but data is only available from simulated environments
!38
Source: RootMetrics, Wikipedia, Upfront analysis
What does this all mean?

!39 Image Credit: Pexels

 Traditional Seed & VC more valuable than ever.


Value has shifted from publics to privates but

skills in VC vs. Growth remain distinct.


We are all now broadband, mobile, social &

1-click to buy.

The pace of technology & networks will continue

to create enormous new opportunities.
!40 Image Credit: Pexels
 So yeah,
VC Is Still
A Thing
Mark Suster
@msuster

Chang Xu
@_changxu

Image !4 1
Credit:
Freepik