Fred Wilson and Paul Graham have posted about the change in the environment. Here are the 10 data points I’m considering to inform my view on the implications of the Facebook IPO and the Euro crisis on deal pace, valuations and tech environment.

  1. Over the past ten years, the top 25 VC funds have raised between 25% and 40% of dollars in a given year. In the first half of 2011, it was 100% and through 2011% it was greater than 75%. There are fewer firms managing more dollars. Total investment dollars entering venture are below 30 year median at $12 to $14B, compared to $17B. We aren’t in a period of relative over-investment in the asset class.
  2. VC dollars invested are highly correlated over past ten years to IPO market (corr =.91). This year’s IPO market in dollar terms is the best one in ten years. 2012 IPO proceeds are 3x greater than 2011 at $17B+ but much more concentrated – Facebook is about$15B.
  3. There is no correlation of VC investing to the S&P 500 (corr=0.2). For Silicon Valley, this implies the Euro largely irrelevant in US fund raising markets barring financial apocalypse.
  4. The biggest fund ever raised in venture history was raised this year. At least 5 billion dollar funds have been raised in the last 12 months. That capital has to be deployed.
  5. The private markets are reaping the benefits of big winners – not the public markets. Ten years ago, VCs held their investments between 4 to 5 years before reaching liquidity. Today, it’s 9 years. These longer gestation periods enable growth investment as an asset class 99% of Microsoft’s market cap was created after it went public at $60M.  The same won’t be true for Facebook, Zynga, LinkedIn and others.
  6. Private market forward pricing/overvaluation is leading to public market correction but despite this correction, these are big companies. Look at the 30% to 50% drops in 2012 IPO values. It could be the case that the current billion dollar club of private companies and newly minted public companies will be “misunderstood for long periods of time” and will be undervalued. But FB and LNKD are trading at the best multiples in the market despite this. FB PE is 86 and LNKD is 592.
  7. IPO window is likely closed for 2012.
  8. Tech giants are highly acquisitive. Facebook made more acquisitions than any other pre-IPO company in history, a great trend for the ecosystem. The top 5 tech companies have cash war chests valued at$250B. These large cash balances are the drivers of M&A.
  9. Customer acquisition channels have reached unprecedented scale. Facebook and YouTube are both at roughly 900M. Android and iOS are both at 300M users. Startups have never grown as fast as in the last six months.
  10. Stakes getting bigger and bigger as market caps grow. Software is eating the world. Big market caps imply big outcomes. Competition is heating up: Oracle v Salesforce. Google v Facebook. Android v iOS. With more public companies in the fray, there will only be more competition.

Overall, it’s a balanced scorecard. The tech ecosystem has been frenetic over the past 4 years. I expect to see some settling but it’s still full speed ahead.



8 thoughts on “10 data points on the fund raising environment

  1. Tom, I’ve been thinking a lot about #5 and a couple of related subplots. Mainly 1) will their be any impact on employee retention or attraction? My gut says no but that employees will become more likely to sell before going public. 2) How will the demand from “accredited” or “approved” secondary markets change? More big traditional long only funds? More secondary vehicles like Conway and others? Again, my gut says this opens up, investors become slightly more savvy (optimistic I know) and the correction between private and public is less severe. 3) Will there be increased regulation on these markets? I realize that people are poking around already but I think I’m hoping it doesn’t get too bogged down.

    • These are really good questions.

      1. I don’t think there will be much impact. The market caps of these companies are pretty large (>$10B) so even a small position is meaningful. Those employees who are close to fully vesting probably have options/RSUs that are very much in the money. Those who just joined weren’t expecting as much of a jump and I think will be patient to see if the stocks rebound.

      2. Secondary market demand is driven by (i) lack of returns in the public markets (ii) attractive, well known brand name startups (iii) long gestation times of startups driving employees to seek liquidity (iv) startups not exercising ROFR on those shares. The biggest change in the last year is the highest volume secondary market names have gone public (except Twitter). And the correction from private to public pricing has to give investors pause.

      3. Yes, no question. Particularly after the recent IPO corrections. The SEC is meant to protect the individual investor and most of these retail investors lost lots with recent tech IPOs. I think the SEC will become much more aggressive in protecting the interests of the small shareholder. The biggest difference of secondary markets from public markets are disclosure requirements. Disclosures are expensive and unattractive for smaller private companies. If regulation is enacted, I would expect the additional disclosure requirements would lead startups to shy away from secondary markets, much the same way Sarbanes-Oxley reduced venture backed IPO volume.

  2. I’m so sick of hearing about bubble talk, but I like that your article makes some logical arguments backed up with data. If a company creates value then it has value, the day that changes we have bigger issues than a bubble.

    • It’s hard to differentiate opinion based on experience and pure bluster. I’m glad you like the data. It’s the only way I find to sift through it all.

  3. Pingback: R for Startup Metrics | ex post facto

  4. Pingback: There’s something in the air | ex post facto

Comments are closed.