Unicorns Charge Ahead in 2018
December 27, 2018 | Blog

Unicorns Charge Ahead in 2018

Recapping Five Highlights From A Watershed Year In Private Capital Markets

As 2018 comes to a close, the research team here at SharesPost can’t help but notice what we believe has been a truly historic year.

For private technology growth companies and the ongoing development of private capital markets, 2018 was another year of soaring valuations, record numbers of new unicorns in the U.S. and China, and significant capital inflows. Notably, VC funds grew larger, and some were transformed into “unicorn funds,” those with more than $1 billion in investable capital. VC funding continued at an accelerated pace. Meanwhile, private growth investors enjoyed one of the strongest liquidity environments in recent times, driven by healthy IPO and M&A environments, and expanding acceptance for secondary markets. In short, it was a very good year.

The following are five highlights from a year that will likely be remembered as monumental.

No. 1. A record number of unicorns completed IPOs, yet private IPOs remain the primary source of growth capital.

During 2018, we tracked 19 unicorn IPOs compared to 16 in 2017 and four in 2016. Despite the very healthy IPO environment, VC-backed tech companies that went public this year raised more capital privately prior to their 2018 IPOs.

Source: SharesPost Research; Pitchbook (Spotify not included due to direct listing)

From a private funding standpoint, we estimate that VCs and private growth investors directed $77 billion in capital to U.S.-based tech companies in 2018. This level of funding has been unmatched since the dot-com days. However, this time the growth is fueled by Private IPOs – primary funding rounds raising over $100 million. We continue to believe that capital is moving quickly from public markets to private companies, which is motivating growth companies to stay private longer. Importantly, this trend remained unchanged during 2018 and is likely to continue in 2019. The median age of those companies that went public during 2018 was about 12 years.

No. 2. Private tech M&A deals rise as strategic buyers step in.

It wasn’t just a robust year for IPOs. 2018 also proved to be a healthy year for M&A exits for SharesPost-tracked companies. The majority of M&A companies experienced a significant increase in valuation upon on acquisition. Eight saw their valuation jump over 100 percent! The average premium paid on acquisition for this cohort was about 82 percent. That figure doesn’t account for preferred share benefits, such as conversion ratios or liquidation preferences. The 82 percent figure illustrates what risk-on investors have long known: The private technology growth asset class outperforms most others, albeit with serious downside risks, like Birchbox’s 97 percent valuation collapse.

Source: SharesPost Research; Pitchbook (SugarCRM, Chain, Digg, Orchard App were acquired for an undisclosed sum)
No. 3. Unicorn funds are likely here to stay, and a record number of unicorns are minted.

During 2018, VC funds became larger. We tracked nine $1 billion VC funds that closed in 2018. Over the past six years, the number of billion-dollar VC funds has risen to 50, by our estimate. As VC funds get larger, VCs tend to participate in larger investment rounds, leading to higher valuations and more unicorns. More unicorns were minted this year than any other year in the past decade. The rate at which unicorns are being created has now increased seven out of the last 10 years. 2009 saw no unicorns minted, compared with 57 in 2015 and 85 in 2018.

Source: SharesPost Research; CB Insights

This year on average, seven new companies reached the unicorn mark each month. What’s more, the entire unicorn market grew to more than $1 trillion in valuation. The US and China are home to 75 percent of all unicorns.

No. 4. Softbank and China come to Silicon Valley.

Historically, Silicon Valley has been hegemonic in its ability to raise capital and develop innovative companies. Over the last few years, this dominance has been challenged by Asia. SoftBank is now the crown jewel in funding private tech start-ups; China now hosts 29 percent of all unicorns. The Valley will likely maintain its dominant position well in to the future, but SoftBank and Chinese unicorns will likely be an even greater force in 2019 and beyond.

It’s instructive to note Softbank’s growing influence in the venture ecosystem. In May 2017, Softbank announced the first close of its Vision Fund, which has over $93 billion of committed capital. Investors include sovereign wealth funds from Saudi Arabia and United Arab Emirates, as well as corporations such as Apple, Foxconn, Qualcomm and Sharp. We estimate the Vision Fund and its affiliated funds have invested $28 billion to $30 billion of their committed capital so far. That’s equivalent to over 35 percent of the overall VC funding in 2018.

As notable, the herd of Chinese unicorns grew by 26 firms in 2018, helping push the global market cap of unicorn firms past the $1 trillion mark. A total of 47 Chinese unicorns raised capital in 2018. The average amount raised by these firms was $655 million. Unicorns DiDi Chuxing and TuoTiao together raised $8.4 billion this year. That translated to about 30 percent of all funds raised by Chinese unicorns.

No. 5. Secondary markets continue to mature.

Secondary markets have traditionally been fragmented, opaque, and available only to VC insiders. These limitations have severely restricted access to potential investors. In response to the trend of companies staying private longer, secondary private-company marketplaces have emerged to increase investor and employee liquidity. At the same time, they offer accredited investors an opportunity to invest in disruptive and innovative companies.

Source: SharesPost Research (2018 values as of Q3 2018)

The figure above outlines the transaction make-up by security type on SharesPost’s registered broker-dealer ATS over that past 10 years. The health of SharesPost’s marketplace is reflected in the mix of securities and the different types of users on the platform – VCs and supported issuer employees.

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is 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.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own financial advisors before making any investment decisions. 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 service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

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

Analyst compensation is indirectly based upon the growth and success of SharesPost, Inc., including the overall performance of its subsidiaries, the individualized performance of any such analyst, and the development and progression of the overall research effort. SharesPost, Inc. earns revenue from, among other avenues, brokerage sales, and therefore the analyst may indirectly benefit from research reports that have the ultimate effect of increasing trading activity, either through SharesPost Financial Corporation and/or with SharesPost Investment Management, LLC.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be offered by SharesPost Financial Corporation, member 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, 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.

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

Copyright SharesPost, Inc. 2019. All rights reserved.

Alejandro Ortiz

Alejandro Ortiz

Alejandro is a Research Analyst, Private Investment Research for SharesPost Research LLC. Prior to joining SharesPost, he was a Valuation Analyst at Duff & Phelps with a focus on TMT industries.

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is 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.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own financial advisors before making any investment decisions. 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 service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

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

Analyst compensation is indirectly based upon the growth and success of SharesPost, Inc., including the overall performance of its subsidiaries, the individualized performance of any such analyst, and the development and progression of the overall research effort. SharesPost, Inc. earns revenue from, among other avenues, brokerage sales, and therefore the analyst may indirectly benefit from research reports that have the ultimate effect of increasing trading activity, either through SharesPost Financial Corporation and/or with SharesPost Investment Management, LLC.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be offered by SharesPost Financial Corporation, member 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, 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.

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

Copyright SharesPost, Inc. 2019. All rights reserved.