With seed deal size rising, more non-traditional investment vehicles, and an increasing amount of companies going public, the venture capital industry continues to evolve.
How will it change in 2019? Analysts from investment data research firm PitchBook made six predictions for how the VC climate may shift from current levels. Read on to see the six predictions, as well as a scorecard for the company’s 2018 predictions.
- IPO’s proportion of total VC exit value hits new decade high: There were 138 U.S.-based “unicorns,” or companies valued above $1 billion, as of Aug. 1, which is up 5X from 2011. Those companies are also getting older, “driving a need for liquidity,” PitchBook noted in its prediction. Uber, Lyft, Airbnb, Palantir, Pinterest, Slack, Postmates, CrowdStrike, and Zoom are some that are reported to go public in 2019. It would follow a 2018 that saw more than 80 VC-backed IPOs, the highest since 2014.
- New participants in VC continue to proliferate: Strong VC returns and rising valuations have opened the door for non-traditional investors who are differentiating by finding “creative ways to back attractive businesses” such as avoiding management fees that typical VCs use. The value of deals with non-traditional investor participation reached a decade-high $69.4 billion across 1,667 deals in 2018. “Large pensions, endowments & foundations, sovereign wealth funds and family offices are among some of the major groups we’re seeing increase activity in direct VC deals,” the report says.
- Median early-stage valuation step-ups will hit 2X in 2019: Median early-stage valuations have increased over the last decade, and median early-stage valuation step-ups have spiked over the past two years. “An increase in the age of [startups] at first fundraise and increased investor competition are putting upward pressure on valuations, especially at the early stage when [startups] begin to accelerate growth,” PitchBook said.
- Median angel and seed deal size will continue to climb: Median angel and seed deal size has climbed from $500,000 in 2012 to $1.2 million in 2018 while the median age of companies at this funding stage has nearly doubled. “We see no reason why the median age of angel & seed [VC-backed startups] will not continue to rise as access to incubators, accelerators and entrepreneurial resources expands and as investors’ expectations in [VC-backed startup] maturity continue to grow,” the report says. “These factors in combination with elevated levels of dry powder available across the venture ecosystem are creating dual forces of increasing the attractiveness of early-stage ventures and increasing the pressure and competition among VC funds to deploy capital.”
- Growth in median fund size decelerates: The median venture fund size was around $40 to $50 million for the past five years but skyrocketed to $80 million this year. PitchBook expects fund sizes to “hit a ceiling as GPs refrain from raising excess capital to maintain venture-like returns.” Larger capital pools have proven to be a competitive advantage for some funds as non-traditional investors such as SoftBank come into play. “We assert, however, that given recent inflationary dynamics in venture markets, larger funds may eventually make it harder to deliver venture-like returns to investors,” the report notes.
- Banks back more institutional blockchain solutions: While cryptocurrency may be over-hyped, there have been several pilot programs run by Nasdaq, the Australia Securities Exchange, Depository Trust & Clearing Corporation, and others testing blockchain technology in capital markets. There were 43 bank investors that participated in a blockchain or crypto VC and growth equity investments in 2018, up from seven in 2017. “Given the operational efficiencies that can be achieved with institutional blockchain solutions, we expect more strategic investment from potential beneficiaries such as banks and financial institutions in the coming year, as measured by number of blockchain rounds with bank participation,” the report notes.
Here are the predictions from 2018 and how Pitchbook assessed itself:
- VC valuations will continue to bifurcate — split
- Alternative exists will become less alternative — pass
- The median fund size will continue to grow — pass
- Venture activity will increase in entrepreneurial hubs outside of California — split
- Unicorns will hit the exits, with haircuts coming to some — split
- Net cash flows to LPs will stay positive as exit values get a boost — pass
- Initial coin offerings (ICOs) will become more institutionalized — fail
- Fintech consolidation will accelerate — split