VC Activity Leveling Off; VC-Backed IPOs Surging

With $26B of venture capital invested in Q3 2019, the first nine months of 2019 saw almost $97B of venture capital invested in approximately 7,900 deals. VC funding continues at a high level, even though it is trending down from Q1 and Q2 both in terms of dollars invested and deals closed. It is safe to say that VC investment in 2019 will fall short of the $138B invested in 2018, however VC investment will certainly top $100B for the second year in a row.

Annual Exit Value Tops $200B for the First Time

VC-backed IPOs continue to grab the headlines. There were six, multibillion-dollar VC-backed IPOs in Q3. Of the $227B of VC-backed exits realized in 2019, 82% of the exit value was achieved through an IPO. In Q3, 189 VC-backed deals closed with a total value of more than $35B. Q3 exits pushed annual exit value above $200B for the first time ever, and we still have another quarter to go.

Mega Deals Still the Norm

With significant amounts of dry powder on the sidelines, mega deals (deals of $100M or more) continue to dominate the VC landscape. Through the first three quarters of 2019, 185 mega deals have already closed. These mega deals represent more than 40% of 2019 deal value. With LPs allocating some distributed capital back into new VC funds and VCs continuing to raise relatively large funds, I do not see a slowdown in mega deals anytime soon.

Recent IPO Performance May Have Longer-Term Market Impacts

Many of the recent VC- backed IPOs are now trading at prices well below their initial public market prices. Also, some newly public VC-backed companies have seen their market caps fall considerably below their last private market valuations. The recent below-optimum performance for new IPOs will certainly have an impact on those VC-backed companies thinking about IPOs in Q4 or in 2020 and beyond.

Outlook

I do expect VC investment for 2019 to exceed $100B for the second year in a row, but it will certainly fall short of the record $138B achieved in 2018. It will be interesting to follow the IPO market in Q4, especially as result of the delay of the WeWork IPO and with several unicorn IPOs underperforming the market and trading at prices below their last private rounds. We have not seen any significant retrenching of valuations just yet, but I would certainly keep my eye on valuations in the near future. Pay close attention to the pricing of later-stage VC rounds as well as the pricing of unicorn IPO activity. Let’s see how future IPOs get priced after watching the recent performance of unicorn  companies such as Peloton, Uber, Lyft and others.