VC Market Closes Out a Successful Decade

DP:Good, I'm doing well. So, tell us, we're not only reflecting on the final quarter of last year, but we're really thinking in terms of the decade as well. So, from a high level, give us your takeaway from the 2010s.
AW:You know, it's funny, the last two years, 2018, 2019, they were really great years for venture capital investing, and I actually went back and looked at the first eight years of the decade, and it really has been a tremendous 10 years for VC investing. Over $760 billion of venture capital invested in the U.S., and the decade of the 2010s has really spurred innovation in many areas, including artificial intelligence, streaming video, digital health, just to name a few. If you think about some of the great tech companies in the decade, probably the one that comes to mind first is Apple. Ten years ago, Apple had a 3G iPhone that was selling for under $200 and had a three-and-a-half-inch screen. And you fast forward to 2019 and the iPhone 11 selling for a little under $1,000, almost a six-inch screen, great displays, infrared probes. Ten years ago, Apple didn't have products like the Air Pods; they didn't have video and game subscription services, which today in its own right is a $50-billion-a-year business for Apple. So I think it's really been a great decade for technological advancement and development.

DP:Let's bring our attention back to 2019. What are your thoughts for that year in particular?

AW:You know, great year for VC investment. About $136 billion invested. The second best year of the decade in terms of VC dollars being invested in the space, mega deals, or deals over $100 million, still tend to be the norm. Approximately 40% of the VC dollars invested in 2019 were actually in mega deals. There were 237 mega deals last year. It was the largest year ever for mega deal activity.
DP:Okay, good. Now I'm reading about a few possible IPOs on the horizon, such as Door Dash and Draft Kings. Is there anything that these companies can learn from IPOs of the past year or the past decade? Anything going to change about the way IPOs happen?
AW:Well, you know, to set the landscape first on IPO activity, last year we saw $250 billion of VC-backed company exits, probably about 75%-80% of those were for IPOs. Interesting time for VC-backed IPO activity in that a lot of these companies today are trading at values below where the last private rounds were raised. And I think as a result of that you could make the argument that VCs might be much more cautious in the future in terms of their investing activity. And when you think about the IPOs of the recent past, a lot of them continue to have losses. A lot of them have not really proven a road to profitability, yet continue to show losses. And you're even seeing questionable corporate governance practices, which could cause a problem. So I think a lot of people are sitting on the sidelines looking at what these IPOs are going to mean for the future.
DP:Instead of asking you what the new year holds, I'm going to go bigger and ask, what's the landscape for venture capital going to be over the course of the 2020s? When we're sitting here 10 years from now and looking back and saying, the 2020s we're really the decade of what?
AW:I think that's a great question, and there's almost two sides of the coin on this. There's a lot of dollars out there. VC funds continue to raise enormous new funds. You have a lot of dry powder waiting to be invested. So when you hear that, you look at supply and demand, you'd think that VCs can continue to push money into the market, and you expect to see valuations continue to be at a pretty high level. The other side of that is that there have been some questions around VC-backed IPOs. You know, valuations have come into question recently. So, that's sort of on the negative side.

I think another interesting phenomenon is that you're seeing a lot of buyout funds now raise pools of capital to invest in the tech sector. And last year, private equity deals involving technology companies represented 20% of PE activity. That's double what it was five years ago. So, I'm still very bullish on the tech space, but there are some reasons to be concerned.
DP:Well, I mean next time we're going to take a look at quarter one of 2020, and that may give us some indication of where the markets are headed. So Alan, as always, thanks for your expertise and your insight.
AW:Thanks Dave.
DP:Thank you for listening to EisnerAmper's podcast series. Visit eisneramper.com for more information on this and a host of other topics, and join us for our next EisnerAmper podcast when we get down to business.