The verdict is in: Mega primary financing rounds in private tech companies are now the new normal as the Private Tech Growth asset class continues to flourish.
In 2016, we declared that late stage, VC-backed companies powered by mega rounds had emerged into a new asset class, Private Tech Growth Equity. At the time, there were concerns about irrational exuberance in the VC ecosystem and worries that many unicorns could lose their horns. After a slight pause in VC funding during 2016, the trends of the past 24 months in private capital markets confirm that private IPOs (mega rounds of $100 million or more) are here to stay.
In fact, the feared bubble in VC financing never occurred. That’s partly because the dynamics of venture ecosystem have fundamentally changed. The evidence suggests that private IPOs are replacing traditional public IPOs. Over the past four years, private IPOs have raised three times more capital than public tech IPOs, according to data from Pitchbook and University of Florida business professor Jay Ritter. In essence, we’re seeing a dramatic shift in value creation from the public markets to the private.
Here are three reasons why we believe venture ecosystem will continue to grow and flourish:
No 1. Tech companies have raised 3x more capital from Private IPOs than traditional public IPOs: Since 2014, roughly 160 VC-backed tech firms raised $34 billion from their public IPOs. By comparison, companies raised a total of $110 billion from private IPOs, about triple the amount as public IPOs. As noted in our first report on the topic in 2016, VC funding doubled between 2009 and 2012, and again between 2013 and 2016. Based on the trends observed in the past six months, we believe that VC funding could double yet again in the next 24 months, largely driven by dollars flowing into the private tech companies via mega-funding rounds. Are we seeing a new Moore’s law with regard to venture funding? Whether we will witness another doubling of venture capital funding remains to be seen, but it’s clear that VC-backed firms can now raise all of the money they need in private rounds of financing. An IPO is no longer necessary.
No. 2. The majority of VC funding growth now comes via private IPOs: Private tech investors have invested nearly $350 billion in U.S. private tech companies since 2009. Private IPOs have accounted for about 45% of $350 billion or roughly $150 billion in funding since 2009.
Private tech companies raised roughly $4 billion via private IPOs in 2010. This represented 10% of all VC funding in private tech companies in 2010. In 2017, private IPOs accounted for more than $30 billion, or 55% of all VC funding. The fact is that the vast majority of growth in VC funding dollars is from private IPOs. We expect this trend to continue over the years to come. At the same time, we still expect a continued flow of investment to venture-backed companies that aren’t mega rounds.
No. 3. A zero-sum game is developing among public and private IPOs: We are in the midst the longest, least volatile and most sustained tech bull market since the dawn of personal computing. NASDAQ is up more than 400 percent since early 2009. Despite this bull market, we’ve witnessed a marked decline in tech IPOs. This new normal is one of the most remarkable developments in tech history. Not so coincidentally, the number of unicorns minted in private capital markets has continued to grow. Since 2014, the number of tech companies that have either gone public or have raised private funding through a private IPO has stayed constant at about 125 per year. During the same period, IPOs have steadily declined from about 50 in 2014 to about 30 per year (annualized) in 2018. The number of private IPOs has increased from about 70 in 2014 to over 130 (annualized) in 2018. We believe a zero-sum game has occurred. Because companies are staying private longer, they are effectively shifting value creation from public markets to private markets.
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