The good times keep rolling for private growth tech companies.
In the third quarter of 2017, the SharesPost Private Growth Index increased from 107.34 (as of June 30) to 112.63 (as of Sept. 30). The increase represents a 4.9 percent rise in valuations for the 87 private growth companies in the Index, compared to a 4.0 percent increase in the S&P 500 and a 7.4 percent increase in the Dow Jones U.S. Technology Index.
On a YTD basis through September 30, 2017, the Index valuation increased by 12.6 percent. This increase is similar to the 12.5 percent increase in the S&P 500. However, the Index trailed the 24.8 percent increase in the Dow Jones U.S. Technology Index.
On a cumulative basis, the Index increased approximately 92.9 percent from Jan. 1, 2015 through Sept. 30, 2017. This rise compares to an increase of 22.4 percent for the S&P 500 and an increase of 44.1 percent for the Dow Jones U.S. Technology Index.
While the Index’s Q3 performance was strong, preliminary Q4 data indicate that the Index has lagged behind the performance of public market equities, which benefited from the continuing bull markets. The Q4 Index is due out in early April 2018.
We launched the SharesPost U.S. Private Growth Index in July 2017 as part of SharesPost’s larger mission to provide liquidity to the asset category through a combination of trading, asset management, research, and data.
If we zoom in to the most recent nine quarters, we see that growth rates in the valuation levels of private growth companies have trailed behind their public market counterparts. We believe the recent underperformance of private growth companies creates an attractive entry point for investors in 2018 and beyond. Additionally, if we look at the two most recent quarters, the Index has outperformed the S&P 500.
The key events that affected Index performance during the third quarter of 2017 included:
(+) Upside drivers: Primary funding rounds announced during Q3 included Auris Surgical Robotics (+107%), Betterment (+55%), Nextdoor (+44%), and Space Exploration Technologies (+31%). On average, the valuations of these companies increased by 59 percent as a result of primary funding rounds. During Q3, there weren’t any notable acquisitions of the companies included in the Index.
(–) Downside drivers: Down-round IPOs and the subsequent weak post-IPO performance of Snap, Tintri, and Blue Apron contributed to downward pressure on the Index’s performance. The acquisition of Lithium Technologies also affected Index performance over the past 90 days. During Q3, there were no private funding down-rounds reported by the companies in the Index. We also noted modest downward revisions of mutual fund valuation marks for mega-cap private growth companies such as Uber.
For YTD through Nov. 30, 2017, our preliminary data indicate that the Index has increased 14.4 percent compared to an 18.3 percent increase in the S&P 500 and a 35.5 percent increase in the Dow Jones U.S. Technology Index. In other words, the Index has lagged in performance in Q4 through November when compared to the continued bull-market rally in the public markets. Key contributors to performance so far include CrowdStrike’s primary funding round, MongoDB’s successful IPO, and Blue Apron’s weak post-IPO performance.
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Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should 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 and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.
Accordingly, 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.
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