Median late-stage (series D and later) venture capital-backed technology company valuations have risen steadily from approximately $47 million in 2009 to $207.7 million in 2014, nudging down slightly to $187.1 million year-to-date 2015 (through March 27). The rise in late-stage valuations is not surprising, given the recovering U.S. economy, strong public markets and low interest rates. These tailwinds have not only contributed to valuation increases in later stages but broadly across all venture stages. For example, while the current median late-stage venture capital-backed company valuation is 4.2 times higher than it was in 2009, seed and series A valuations also rose, increasing by 2.2 times and 2.6 times their respective 2009 valuations.
Between 2009 and 2014, the number of venture-backed technology company initial public offerings (IPOs) rose strongly from five in 2009, to 34 in 2014. This was due to the industry's ability to exit portfolio companies following the onset of the "Great Recession," aided by many of the factors mentioned previously. In 2015 (through March 27), however, the number of IPOs has fallen precipitously to two (or eight technology company IPOs, annualized).
One theory on the drop in venture-backed company IPO activity in 2015 is that later-round valuations, in many cases, are approaching levels that exceed those that the public markets would ascribe to these companies. At the extremes, companies like Uber, valued at $41.2 billion; Snapchat, valued at $15.0 billion, and Airbnb, valued at $19 billion, could face a challenging exit environment.1 To give perspective on Uber, for example, the company's current valuation puts it in-line with such public companies as Nissan Motor, Capital One Financial and Target. Snapchat and Airbnb's valuations are similar to the market capitalizations of Toshiba, Sumitomo and Standard Life. It will be interesting to witness how the public market's reassessment of private market valuations plays out.
Key Takeaways: Because the drop in deal count is a relatively near-term phenomenon, determining causation and whether this signals a long-term trend is a bit premature. What is clear, however, is that since 2009, late-stage valuations have more than quadrupled while seed and series A median valuations have more than doubled. As has always been the case in venture capital, some of these highly valued assets will become successes, while many others will fail. Because of the more modest run-up of earlier stage valuations versus later stage companies, more upside potential in earlier stage companies should be expected, which, of course, come with their own unique set of risks (e.g., start-up risk.) As such, focusing your efforts on identifying earlier-stage managers, while opportunistically allocating to later-stage funds where managers may have an information advantage within their given investment area, is a reasonable approach.
1Source: PitchBook, valuations as of March 23, 2015, March 19, 2015, and March 3, 2015, respectively.The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
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