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A year of opportunity, not exits

Last year was a year of mega deals, captivating innovation, an early-stage softening, eager limited partners and SoftBank.

It was not a year of exits.

Investment activity ran swift in venture capital as a plethora of compelling macro trends, from artificial intelligence and internet marketplaces to drug discovery, guided deal making.

“If you are smart and can sort through the noise, there is a lot of opportunity,” said Paul Arnold, a partner at Switch Ventures.

However, exit markets did not keep pace with the money swarming into the asset class. The IPO and M&A markets were tepid at best, likely keeping a lid on distributions in the quarters to come. Fears of the inevitable downswing seemed to rise as market gains and deal size increases pressed ahead.

Perhaps most significant, 2017 was a year of big money and new investors. Venture investments in the United States could top $64 billion by year’s end, coming close to the post-2000 record of $69 billion set in 2015, even as the number of deals continued its two-year decline, according to Thomson Reuters data. Of course, if the Uber-SoftBank deal were to close before the end of the year, that number could jump substantially.

Despite this, Series A transaction volume slumped as summer turned to fall.

Behind the momentum was a stream of new money. A more-than-ample $27 billion will likely have been raised in 2017, less than 2016’s gargantuan $42 billion, but marking a fourth straight year of accelerated fundraising. Of note is that only three $1 billion-plus funds were raised.

Combine the inflows with the surge of non-traditional money and venture is clearly a well-funded asset class.

Among the non-traditionals playing a big role in 2017 were private-equity firms, which showed a heightened interest in both growth investing and software takeovers. Interest from corporate venture groups also expanded, with no corporate commanding a greater profile, or mandate, than SoftBank, which in May unveiled its now $98 billion Vision Fund.

Less publicized but also significant interlopers were sovereign wealth funds, acting both on their own and in partnership with other investors. The Public Investment Fund of the Kingdom of Saudi Arabia and the Mubadala Investment Company of the United Arab Emirates contributed money to the Vision Fund, representing what could be the beginning of a growing source of capital.

Some funds have gone so far as to set up offices in Silicon Valley, with Qatar’s Sovereign Wealth Fund and Mubadala among the latest.

“Over the next years we will probably see them leading deals in the valley,” said Rohit Kulkarni, a managing director at SharesPost. “That is going to change the way the IPO market will happen over the next two to three years (and it) is going to change the way the M&A market will happen over the next two to three years.”

Rohit Kulkarni
Rohit Kulkarni

On the other side of the equation, exits markets failed to keep up. Just 42 U.S.-based venture-backed companies found their way onto the NYSE and Nasdaq markets as of mid-December, far fewer than hoped for at the start of the year, according to data from Thomson Reuters.

Results of the offerings were decidedly mixed. Though Roku, Okta, Redfin, MuleSoft, Denali Therapeutics and even Stitch Fix performed relatively well, Snap, Blue Apron, Cloudera and MongoDB failed to live up to their potential.

Clearly the year’s performance hasn’t whetted the public market’s appetite for deals in 2018, though obvious blockbusters, such as Uber and Airbnb, could prove an exception.

The same lackluster year plagued M&A. When the year’s tally is complete, 2017 will likely see the sale of about 350 U.S.-based venture-backed companies, roughly mirroring 2016 and maintaining the slowest deal pace of the past half-decade.

Perhaps the most encouraging sign are this year’s private-equity-backed software deals, which hold out hope for a new class of acquirers. In security, for instance, the consolidators have changed, noted Donald Dixon, a managing director at Trident Capital Cybersecurity.

Donald Dixon China
Donald Dixon, managing director, Trident Capital Cybersecurity. Photo courtesy of the firm.

“The big deals have been done by the PE-backed platforms,” Dixon said. “That is very good for venture capital.”

One example is TPG Capital-backed McAfee’s November purchase of Skyhigh Networks, which received investments from Greylock Partners, Sequoia Capital and others.

Venture capitalists can now think differently about their timeline for investments, Dixon said. Companies can grow big enough to be acquisition targets in three to four years instead of the eight years it might take to be a candidate for an IPO.


Another positive sign from the year was the rapid pace of innovation. In the hot sector of artificial intelligence, $1 billion went into venture-backed companies in each of the year’s first three quarters, according to PricewaterhouseCoopers and CB Insights. Companies such as Nauto raised $159 million with SoftBank as a backer and Tanium attracted $100 million in a secondary sale. In healthcare, AI’s promise was particularly pronounced. Freenome received $65 million from backers Andreessen Horowitz, Data Collective and others, and $60 million in funding went to U.K.-based Babylon Health.

Perhaps even more eye-catching was a pledge from GlaxoSmithKline. Big pharmaceutical companies, and startups, hope use AI to target diseases and rapidly bring new molecules from computer simulation to clinic trials and to the market, but prospects are unclear. GlaxoSmithKline turned heads with its vow to do it in 1 year rather than the 5-and-a-half years it takes at present.

Such ambitions led life sciences investing to record levels in 2017. Through September, U.S. startups gathered $12.1 billion, according to PitchBook and the National Venture Capital Association, with the year-end total likely to exceed 2015’s $14.5 billion. Deal count also was relatively strong and likely to match last year’s.

Another hot sector proved to be cryptocurrencies, particularly bitcoin, where price speculation surged at year-end. Coinbase, which raised $100 million in August from IVP, Spark Capital, Battery Ventures and others, was perhaps the highest-profile deal in the sector and was left in a good position to capitalize on heightened trading volumes and a custody program for institutional clients.

A third top area of investor sentiment was virtual and augmented reality. Two big deals, Magic Leap’s $502 million round and Unity Technologies’ $400 million financing, reflect enthusiasm for software platforms. A third company, Improbable, won $502 million in backing from SoftBank and others.

What this suggests is “there is more investor appetite over the longer term,” Kulkarni observed.

Consumer vs. enterprise

By in large, the year saw greater investor enthusiasm for enterprise rather than consumer deals. In cloud, that meant looking beyond the horizontal platforms of the past, such as CRM, and toward vertical, industry-specific business models.

It also meant acknowledging that corporate customers are selecting heterogeneous approaches to cloud, rather than standardizing on Amazon Web Services or Microsoft’s Azure.

Yanev Suissa, founding general partner, SineWave Ventures. Photo courtesy of the firm.

For Yanev Suissa, founding general partner at SineWave Ventures, one telling deal was Microsoft’s purchase of Cycle Computing. The acquisition showed that Microsoft is paying attention to the needs for new customer capabilities.

“It’s not going to be one size fits all,” Suissa noted. He said the Microsoft deal reinforces his desire to invest in this “democratization” trend, adding that he was eyeing Rescale, a cloud platform for high performance computing.


Another area that saw a shift in investor attention was edtech, where several deals stood out for their size.

Scaling companies is easier than five years ago, when fewer schools had access to high-speed broadband and students weren’t always assigned their own device, said Amit Patel, a partner at Owl Ventures. This has changed the way people invest.

One large deal was VIPKID’s $200 million Sequoia Capital-led round, which illustrated how edtech is becoming an international play.

Edtech VC
Amit Patel, partner, Owl Ventures. Photo courtesy of the firm.

“We’re starting to see companies leveraging educators in one country and matching them with students in another country,” Patel said. “There is global demand for education technology companies.”

The deal also begins to deliver on the promise of one-to-one instruction, he said.

It is a theme Owl has pick up on with its language coaching investment in Lingo Live and its investment with BetterLesson, a company targeting professional development for teachers.

“It is a theme we will continue to invest in,” Patel said.

Another deal in the sector was EVERFI’s $190 million round, which drew money from TPG’s Rise Fund and offered a sign the space is getting more attention.

Perhaps the most talked about event in the consumer sector was Snap’s underperforming IPO, where the tug of war between bulls, excited about new implementations of technology, and the bears, worried about valuations, business models and troubled unicorns, rose to the surface. Opinion at first seemed evenly divided on whether the stock would go up or down.

The same push-pull is likely to hound Uber and other unicorns as 2018 unfolds.

Interest in the sharing economy nevertheless remained high. In August, WeWork raised $4.4 billion from SoftBank and two months later Lyft announced a $1 billion round led by CapitalG.

Airbnb-like pet-sitter network also unveiled a $65 million round led by Spark Capital and backed by Bespoke Strategies, StepStone Group, Madrona Venture Group, Menlo Ventures, Foundry Group, OMERS Ventures and Technology Crossover Ventures.

Ecommerce also saw Fanatics win $1 billion from SoftBank and others.

“I think ecommerce has a lot of legs,” Arnold said. “Ecommerce has 20 years of growth in it.”

Paul Arnold, partner at Switch Ventures. Photo by Portrait Photographer Marc Olivier Le Blanc.

One deal he pointed to was a $2.6 million round for Heist Studios, a London-based seller of tights. Another deal with a similar theme was the sale of True&Co, backed by Cowboy Ventures, to Phillips Van Heusen.

“It’s a mega trend of putting a fresh brand on a direct to consumer business and getting the brick and mortar out of the way,” he said. “I think the female demographics is the most appealing place to think about building an ecommerce business.”


The agtech sector was another place with plenty of action. Funding is likely to hit a record in 2017, with big deals such as Plenty’s $200 million round, Farmers Business Network’s $110 million round and Bowery Farming’s $20 million round playing a role.

One interesting theme couples food with the sharing economy. An example is VizEat’s September acquisition of EatWith. People remember the overall experience of a trip, not simply the accommodations, said Jacob Shea, a partner at Structure Capital.

Shea said he finds the sector appealing. “For us, it’s the market place and the trust it can create in that community. To go deep first and then go wide can establish trust.”

He says he will look for deals in 2018.

Photo of a businessman looking back at 2017 courtesy of DNY59/iStock/Getty Images

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