$10 million? Whatever. The normal in VC financing is $100 million plus.
September 8, 2018 | Blog

$10 million? Whatever. The normal in VC financing is $100 million plus.

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.

Exhibit 1: Capital Raised via Private IPOs vs. Public IPOs (in $MM)
Exhibit 1: Capital Raised via Private IPOs vs. Public IPOs (in $MM)
Source: SharesPost Research, Pitchbook, Jay R. Ritter; Chart includes data for VC-backed Tech companies

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.

Exhibit 2: Overall VC investments have increased, Private IPOs have increased at a faster rate
Exhibit 2: Overall VC investments have increased, Private IPOs have increased at a faster rate
Source: SharesPost Research; Pitchbook; Chart includes data for VC-backed Tech companies

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.

Exhibit 3: Gradual mix-shift towards Private IPOs as mega deals outnumber public IPOs
Exhibit 3: Gradual mix-shift towards Private IPOs as mega deals outnumber public IPOs
Source: SharesPost Research, Pitchbook, Jay R. Ritter; Chart highlights the number of data for VC-backed Tech companies
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CONFLICTS: This report is being published by SharesPost Research LLC and distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation, and SP Investments Management LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost Inc. SP Investments Management is the investment manager of the SharesPost 100 Fund, a registered investment company, and other funds.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction. This report does not constitute an offer to provide investment advice or services. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or advisability of a particular investment or transaction, (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

Information regarding companies in the SharesPost 100 List available on the website has been collected from or generated from publicly available sources. The availability of company information does not indicate that these companies have endorsed, supported, or otherwise participated with SharesPost. Company “thesis” is the opinion of SharesPost and is not a recommendation to buy, sell, or hold any security of such company.

Investors should be aware that, at any given point in time, the SharesPost 100 Fund (the “Fund”) may or may not have an ownership interest in any of the issuers discussed in the report. Accordingly, investors should not rely on the content of this report when deciding whether to buy, hold, or sell interests in the Fund. Instead, investors are encouraged to do their own independent research. Before investing in the Fund, investors are cautioned to carefully consider the investment objectives, risks, charges, and expenses before investing. For a prospectus containing more information about the Fund, please visit www.sharespost100fund.com. Read the prospectus carefully before investing.

ANALYST CERTIFICATION: The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers and that no part of such analyst compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.

Analyst compensation is based upon various factors, including the overall performance of SharesPost Inc. and its subsidiaries and the performance and productivity of such analyst, including (1) feedback from clients of the SharesPost Financial Corporation and other stakeholders in our ecosystem, (2) the quality of such analyst’s research, and (3) the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost Inc., including brokerage sales.

DISCLAIMER: This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid, and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks. You should complete your own independent due diligence regarding the investment, including obtaining additional company information, opinions, financial projections, and legal or other investment advice.

Investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, SharesPost Investment Management, the SharesPost 100 Fund, and the SharesPost 100 List are all registered trademarks of SharesPost Inc. All other trademarks are the property of their respective owners.

Copyright © SharesPost, Inc. 2019. All rights reserved.

Rohit Kulkarni

Rohit Kulkarni

Rohit is the Managing Director, Private Investment Research for SharesPost Research LLC. Prior to joining SharesPost, Rohit was a Vice President, Senior Analyst at RBC Capital Markets.
Please Read These Important Legal Notices and Disclosures

CONFLICTS: This report is being published by SharesPost Research LLC and distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation, and SP Investments Management LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost Inc. SP Investments Management is the investment manager of the SharesPost 100 Fund, a registered investment company, and other funds.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction. This report does not constitute an offer to provide investment advice or services. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or advisability of a particular investment or transaction, (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

Information regarding companies in the SharesPost 100 List available on the website has been collected from or generated from publicly available sources. The availability of company information does not indicate that these companies have endorsed, supported, or otherwise participated with SharesPost. Company “thesis” is the opinion of SharesPost and is not a recommendation to buy, sell, or hold any security of such company.

Investors should be aware that, at any given point in time, the SharesPost 100 Fund (the “Fund”) may or may not have an ownership interest in any of the issuers discussed in the report. Accordingly, investors should not rely on the content of this report when deciding whether to buy, hold, or sell interests in the Fund. Instead, investors are encouraged to do their own independent research. Before investing in the Fund, investors are cautioned to carefully consider the investment objectives, risks, charges, and expenses before investing. For a prospectus containing more information about the Fund, please visit www.sharespost100fund.com. Read the prospectus carefully before investing.

ANALYST CERTIFICATION: The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers and that no part of such analyst compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.

Analyst compensation is based upon various factors, including the overall performance of SharesPost Inc. and its subsidiaries and the performance and productivity of such analyst, including (1) feedback from clients of the SharesPost Financial Corporation and other stakeholders in our ecosystem, (2) the quality of such analyst’s research, and (3) the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost Inc., including brokerage sales.

DISCLAIMER: This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid, and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks. You should complete your own independent due diligence regarding the investment, including obtaining additional company information, opinions, financial projections, and legal or other investment advice.

Investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, SharesPost Investment Management, the SharesPost 100 Fund, and the SharesPost 100 List are all registered trademarks of SharesPost Inc. All other trademarks are the property of their respective owners.

Copyright © SharesPost, Inc. 2019. All rights reserved.