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PE & VC News

CB Insights, the financial data tracking firm, recently put out a list of a new US-based companies on the “unicorn” startup list (a unicorn is a privately-held company with a valuation of at least $1 billion).  Who’s on it?

Just a Little Background

Before getting into the list of companies with newly minted valuations of over $1 billion, some background seems useful.  In the prior quarter, the startup universe welcomed another 9 companies to the unicorn world, the highest quarterly total since the third quarter of 2015.

Interestingly, although the typical point at which a company reaches a $1 billion valuation is in later stage funding rounds, 3 of this quarter’s 12 companies earned their $1 billion-plus valuation at mid-stage funding rounds.

Additionally, 8 of the 12 companies saw funding raises of over $100 million, while 3 of the companies landed on the unicorn list with raises under $100 million, including Quora, Rocket Lab, and Symphony.

The List

#1 Outcome Health

First on the list is Outcome Health, with a massive valuation of $5.5 billion.  The company provides education content and interactive health assessments through tablets, in-office video screens, custom applications, and various other medium.  Not bad for co-founders Rishi Shah and Shadha Agarwal.

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#2 Quora

Second on the list is a hub for online discussion, which allows users to post questions and give analysis and opinions on posed question.  Perhaps fascinating, given the perceived simple nature of the business model, Quora came in with a valuation of $1.8 billion, a nice chunk of change for co-founder and CEO Adam D’Angelo.

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#3 Avidxchange

Third on the list is is the first fintech startup – Avidxchange.  Avidxchange came in with a valuation of $1.4 billion, a healthy amount of value for a company that automates invoicing and payment processing for midsize companies.

Perhaps the most interesting aspect of the funding round was that Canadian pension-plan investor CDPQ funded a third of Avidxchange’s recent $300 million round.

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#4 C3 IOT

Fourth on the list is the first internet-of-things company, C3 IOT.  The company offers a platform for design, development, and operation of enterprise-scale big data, predictive analytics, artificial intelligence, and internet-of-things applications.  The amount of the round was undisclosed, but the valuation came in at $1.4 billion.

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#5 Robinhood

Rounding out the top 5 is Robinhood, with a valuation of about $1.3 billion.  The company has a novel idea, allowing users to trade stocks without paying commission.

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#6 – #12

The remaining 7 members of this quarter’s “group of 12″ unicorns includes Rubrik, Peleton, Clover Health, Crowdstrike, Rocket Lab, Katerra, and Symphony.

Conclusion

Overall, valuation continue the upward climb.  In CB Insight’s most recent accounting of newly minted unicorn startups, the list includes 12 more companies, ranging from healthcare to cloud banking.  It’s a good day to be an owner of a super-successful startup.

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We’re a little over half way through 2017, and so far it’s been as an interesting year as expected.  We’ve seen equity markets explode through the roof, home prices continuing to rise, a seemingly never ending investigation into potential Russian meddling in the 2016 Presidential election, rumors of war with North Korea, and a host of other economic and political news.

With the state of the world as it stands now, where would you guess the dollar value of private equity-backed deals is heading in 2017?

The Background

Before getting into some speculation, here’s a look at the value of private-equity backed deals from 2007 to 2016, according to Prequin.

The high-point over the past ten years is 2007, with a massive amount of about $700 billion in private equity-backed deals.

Since peaking in 2007, the dollar value of private equity-backed deals has never gotten close to $700 billion again.  In 2008, the dollar value of deals declined to about $206 billion.

Things didn’t improve in 2009, with the value of private equity-backed deals declining further to a ten year low of just $116 billion, a massive drop from $696 billion just two years prior.

The picture improved somewhat following the end of the global recession in 2009.  The following year, 2010, saw private equity-backed deals gain more than double of the prior year, to $239 billion.

Values continued to climb in 2011, to $279 billion, and stayed there in 2012 at about $278 billion.

In 2013, deal value rose again, to $313 billion, and then jumped again to$363 billion in 2014 and $424 billion in 2015.

Interestingly, although the global economy continued to accelerate in 2016, private equity-backed deal value didn’t.  Instead, private equity-backed deal value declined by about $105 billion to just $319 billion.  OK, but nowhere near the 2007 heydays.

pe deals Source: Statista, Prequin

Some Speculation on 2017

So, with the past ten years’ worth of experience as the background, where is 2017 private equity-backed deal value heading?

Obviouisly there are only two directions the figure can go – up or down.  Presuming the global economy doesn’t deteriorate into a recession, private equity-backed deals probably don’t have a huge downside risk.  Perhaps the lowest private equity-backed deal value could reach is maybe $250 billion.  What about the high end?  Well, given that the global economy also doesn’t look like it’s headed for a euphoric bubble, the high end might be somewhere around $450 billion.

These two figures – between $250 billion and $450 billion – represent a huge range, a range that will either leave billions on the table or billions made.  Ahh, the lovely game of private equity.

Conclusion

Overall, private equity-backed deal value sharply declined during the 2008 and 2009 global financial recession.  Since then, private equity-backed deal values have moderately recovered, reaching $319 billion in 2016.

The question now is: Where is deal value heading?  Will private equity-backed deal values rise again, perhaps to above $400 billion or are deal values due for another lackluster year in 2017?  The answer to this question largely depends on how expectations for the future of the global economy for the remainder of 2017 and through 2018 play out in the minds of private equity investors.

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This past week the Fed announced another quarter point rate hike.  The Federal Funds target rate will soon range from 1% to 1.25%, a full 1% higher than the when the Fed began its so-called “tightening” cycle in December 2015.

Question: How might the upcoming Fed tightening moves affect the venture capital markets?  Here’s some speculation.

The Federal Funds Rate

First, a look at the Federal Funds rate, from the 1970s to today.  Over the past 30 years, the Federal Funds rate has varied widely.  In the early 1980s, the rate briefly surpassed 20% – the period known as American hyperinflation.

Since that experience, inflation has been more in control.  Throughout most of the 1980s, the Federal Funds rate generally declined, almost reaching 5% by the end of the decade.

The 1990s also saw a generally sanguine Federal Reserve, moderately lowering or increase the Federal Funds target rate as the economy – or politics – permitted.

Recently, the Fed began another tightening cycle, begun in December 2015.  Given the already incredibly low rate, the question here is whether the Fed’s new attention to raising interest rates will have an effect on private markets, in particular the venture capital markets.

ff Source: Federal Reserve

The Venture Capital Markets

Now, to the venture capital view.  Here’s a look at venture capital deals from 1995 to the first quarter of 2016.

The number of deals generally follows the business cycle, although the sector has some historical nuances.

As any market observer well knows, the dot-com bubble saw massive growth in the number of venture capital deals, an experience that has yet to be repeated almost 20 years later.  The number of venture capital deals over the past 20 years hasn’t even gotten close.

Consistent with the general economy, activity in the venture capital industry dropped off after the financial crisis of 2008/2009, and has since gingerly recovered, although recent estimates have the industry cooling off again.

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Putting the Two Together

So, is there a connection?  The simple answer is – kind of.  To any venture capital financier, it’s well known that the interest rate can affect the value of deals, although the current tightening cycle is still so low that the interest rate is likely to have only a very small impact on the attractiveness of venture capital deals.

What seems to be more present in the data is the overall economic conditions rather than the state of the Federal Funds rate.  Should economic conditions continue to improve, then venture capital markets will likely continue to expand regardless of what the Federal Reserve decides to do with the Federal Funds rate.

Conclusion

Overall, in looking at the Federal Funds rate and the historical performance of the number of venture capital deals, it’s unlikely that further tightening by the Federal Reserve in the coming year will have any measurable impact on the state of the venture capital markets.  Instead, the overall economic growth picture will likely have the larger effect.

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The Jobs Report Stunk. What Does the Financial Jobs Picture Portend for the Latter Half of 2017?

June 12, 2017

Friday’s jobs report could aptly be described as a stinker.  Month-over-month employment growth came in at +138K, a fair bit below analysts’ expectations.  Early month’s growth figures for 2017 were also revised lower, to +50K for March and +174K for April.  The May results beg the question – is the economy header for a recession, […]

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Who’s #1? Looking at the Global League Tables

May 17, 2017

We always find it interesting to see which private equity and venture capital firms are on top of Pitchbook’s Global League Tables.  Here’s a look. Private Equity Firms The U.S. Before looking, which private equity firms would you guess would be on top in the first quarter of 2017?  The firms on top of the […]

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Looking at the State of Venture Capital in 2017 So Far

May 2, 2017

Pitchbook, the private equity and venture capital data collection firm, is out with a look at the state of venture capital industry in the United States so far in 2017.  Here’s a look at what we find to be the 4 most interesting findings. #1 – A Slow Start to the Year First off, activity […]

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Looking Back – and then Forward – on the Financial Industry Jobs Picture

April 3, 2017

The jobs market looks good.  In 2016, the U.S. economy created about 2.2 million jobs.  That’s slightly lower than the 2.7 million in 2015 and 3.0 million in 2014. Wages, a laggard in the current economic boom, are also starting to show up stronger.  Wages accelerated to 2.8 percent year-over-year growth in 2016, a fairly […]

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A Look at What Happened to Private Equity Cash Compensation in 2016

March 6, 2017

Every year Job Search Digest reviews what happened with private equity cash compensation.  Would you guess cash earnings went up or down in 2016?  What percentage of earners made more than $1 million?  How many made less than $50,000?  Here’s a look. The 2015 Picture Before going into the 2016 results (the report’s entire results […]

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Thinking About the 2017 PE Outlook – Is Re-acceleration on the Horizon?

February 20, 2017

This year is off to an interesting start.  Markets are hanging around all-time highs and the global economy looks to be re-accelerating.  Will private equity follow suit? Private equity research firm Pitchbook recently released their perspective on what 2017 has in store. Global Deal Value and Transaction Counts The 2016 year ended in a state […]

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Looking at the Top Private Equity Firms in 2016

February 7, 2017

Every year, Pitchbook – a provider of private equity dealflow data – provides a look at the top private equity firms according to various characteristics.  Here’s a review. Most Active U.S. Firms Before looking at Pitchbook’s figures, which firm would you guess comes out on top in the number of deals in 2016?  Interestingly, it’s […]

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