For context, this makes the 2010s’ total greater than all prior decades of venture capital combined, even including the dot.com bubble period around the turn of the millennium.
And, unsurprisingly, this wave of cash has driven similar comparisons.
Julian Birkinshaw, professor of strategy and entrepreneurship at London Business School, said: “My personal view is we are living in crazy times, where the supply of private money is so large (and the alternative uses for that money are so uninspiring) that we are seeing VC-backed firms hyped up to unsustainable expectations. This bubble has to burst at some point!”
William Janeway, affiliated lecturer of the Faculty of Economics at the University of Cambridge and partner and senior adviser at private equity firm Warburg Pincus, pointed to the source of the massive increase in funding. He said: “As I said on stage [at the GCV Symposium in May], I believe that the mega rounds of late-stage VC are a function of the market scale enabled by digitalisation plus – critically – the financial environment: i.e. real riskfree interests at zero or less than zero.
“Corporate VC is clearly a substantial source of funding in these rounds but the role of non-corporate investors is critical.”
These large, or mega, rounds of at least $100m were relatively rare up until the mid-point of the decade but have been used to fund hundreds of portfolio companies.
The portfolio companies receiving the investment have predominantly been in the US and China, with 127 and 113 large rounds to businesses based in those two countries last year, respectively, according to GCV Analytics.
The rest of the world managed 63 such large rounds in 2018, including 33 in Europe, according to GCV Analytics and the European Investment Fund data, respectively.
If corporations were involved in more than two thirds of all global venture deals by value last year, they were particularly engaged through the large rounds. While making up 303, 13%, of corporate venturing deals in 2018 by volume, up almost 50% from the year before, these $100m-plus rounds were about three-quarters of the global total of 413 tracked by PitchBook.
In aggregate, the corporate venture capital (CVC)-backed large rounds provided 77% of the $181bn by value of deals they were involved in last year, according to GCV Analytics.
This year could again see more than 400 $100m-plus rounds, extrapolating from PitchBook’s 169 deals recorded in the first five months of 2019. And corporations remain the driving force and involved in about three-quarters of these rounds, according to GCV Analytics.
Notably, some portfolio companies are adept at raising multiple large rounds. The 303 CVC-backed large rounds last year involved 257 companies.
Thirty-seven companies have raised four or more rounds of at least $100m this decade, according to GCV Analytics. In aggregate, these 37 companies have raised at least $127bn, more than a quarter of the total committed in all those large rounds.
A majority of these serial large-round-raising companies have been based in Asia, led by mobility companies Grab with its 11 rounds ($6.65bn total) and Didi Chuxing with its 10 rounds ($22.5bn).
But one consideration for the number of large rounds this year could be whether the number of exits as investors look to flotations on stock markets and trade sales as a route to liquidity and returns.
Last year saw a record $249.5bn raised from 194 venture-backed IPOs, according to PitchBook.
For context, this was above the high for all IPOs in 2000 when $242bn was raised from 2,117 flotations, according to academics Craig Doidge, Andrew Karolyi, and Rene Stulz at the National Bureau for Economic Research in their paper, The US Left Behind: The Rise of IPO Activity Around The World.
And, perhaps unsurprisingly given the increased role of CVC-backed large dealmaking, corporate venture-backed IPOs surged as a percentage of the total with 80 out of 194, even if their share of the proceeds fell. This year the proportion has increased still further in the first five months of the year to 58%.
Nearly 40% of the 80 CVC-backed IPOs last year had raised at least one $100m+ round, according to GCV Analytics. But these were the largest IPOs judged by proceeds with more than 80% of the $25bn in proceeds.
Janeway said: “Entrepreneurs who can stay private while funding growth privately at stratospheric valuations (and often while retaining control) have powerful incentives to delay IPOs. But the IPO market itself has followed the concentration [of] the investment banking industry to require larger deals, which means longer time from startup to IPO. So, this is a complex, multi-dimensional problem.”
Janeway at the GCV Symposium had expressed reservations about cash flowing to businesses with “no plausible path to positive cash flow from operations”.
The number of loss-making companies listing on the US stock exchange is approaching a 30-year high, according to Empirical Research Partners data, with the average company going through an IPO now making a loss.
Investor Alex Graham, in a blog post for Toptal, who noted the Empirical data said: “The need to IPO nowadays is not to find new capital sources, but instead to provide liquidity to earlier investors for crystalising their gains. Yet in recent years, companies going public have still not yet settled on stable business models; consequently, the percentage of companies going public with negative earnings has now reached peak dot-com bubble territory.
“The sheer volume of private capital available has blurred the focus on private startups to find sustainability quicker. When they do eventually debut, it can seem like they are limping over the line, instead of galloping onwards.
“It also goes without saying that corporate investors, or those who are not investing money ring-fenced in closed-ended fund structures, could cause contagion risk to the VC market if there is a cash crunch in the wider economy. This could force such entities to try and fire sell assets and/or abruptly curtail investment cadence.”
Josh Lerner, Jacob H Schiff professor of investment banking at Harvard Business School, said: “The same issue surfaced during the dot.com era, where many companies with limited prospects went public at sky-high valuations. Most ended up badly after the market crashed in 2000. At the same time, it is important to remember the companies such as Microsoft and Google were depicted in media accounts as being overvalued at the time they went public [in 1986 and 2004, respectively].”
A similar pattern for mergers and acquisitions (M&A) has also been seen, albeit from a smaller base as trade buyers have struggled with the valuations.
Lerner said: “Certainly, it is hard to imagine many companies being able to buy an Uber, given the size of its market capitalisation relative to its peers. We have seen, though, many of the acquisitions of venture-backed companies in recent years have been at sky-high valuations.”
Last year, CVC-backed trade sales reaped $45bn from 141 M&A deals, primarily in the US. Only 9% of these exits, however, had been to companies that had raised at least one $100m+ round. These trade sales of well-funded portfolio companies were often the most valuable ones, making up 55% of the proceeds.
And the nature of business, whether well-funded, incumbent or startup, remains open to risks, including regulatory changes or protectionism and tariffs between the US and China.
Data provider Crunchbase in a post on the $100m (its term is supergiant) rounds said: “China is driving less supergiant venture capital deal volume than it did in the past”. But the main risk remains misjudging costs and revenues compared to competitors.
In its review of 11 venture-backed business failures, data provider CB Insights said: “When Solyndra folded, it was not just one of the biggest solar company failures of all time — it was one of the biggest VC-backed failures of all time.
Solyndra manufactured a unique type of solar cell made of copper indium gallium selenide (CIGS). At the time, CIGS was a far cheaper alternative to polysilicon, the main component in most solar panels — a fact that helped the company raise a total of $1.2bn…. But what Solyndra’s investors and the government didn’t see — or didn’t understand the importance of — was that the price of polysilicon was on the decline as early as 2008.
“By the time the Department of Energy was setting up the parameters of [its $535m] loan, the price of polysilicon was already starting to plummet, from $475/kg in February 2008 to as low as $73/kg in May 2009. By December 2011, it was under $30/kg. The price collapse of competitor material polysilicon destroyed Solyndra’s value proposition. When it couldn’t sell its systems for any cheaper and still make a profit, the company had to file for bankruptcy. By September 2011, Solyndra’s business model had fallen apart. The company announced it was effectively ceasing operations immediately and filing for Chapter 11 bankruptcy, putting more than 1,100 people out of work overnight.”
But while Solyndra was caught out by the unexpected fall in a rival commodity price, other businesses funded with large rounds have also struggled. SpeedX, a China-based bike maker, and Bluegogo, a sister company set up for bike sharing had tried to raise venture funding to scale up rapidly – something called blitzscaling in Silicon Valley and promoted in a book by Reid Hoffman and Chris Yeh.
In Cycling Tips extensive analysis: “In May 2017, SpeedX and Bluegogo were at the zenith of their industry – a company of more than 500 staff, valued at more than $150m, with an attractive high-end road bike on the way, a fleet of 800,000 sharebikes, and 20 million registered users. Within six months, it was all gone.
“If you ever want to know how it feels when you’re in a startup that goes bust – when hundreds of people lose their jobs and everything they’ve worked so hard to build – just ask a former Bluegogo or SpeedX employee. They’ll tell you; it feels like total despair.”
Critics are circling other hard-riding, well-funded entrepreneurs. US magazine The Intelligencer said: “There are hundreds of co-working companies around the world, but what has long distinguished WeWork is [founder Adam] Neumann’s insistence that his is something bigger. In 2017, Neumann declared that WeWork’s ‘valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.’ He has long maintained that categorising WeWork as a real-estate concern is too limiting; it is a ‘community company’ with huge ambitions.”
WeWork has been valued at $47bn but Intelligencer noted: “In 2000, [magazine] Fast Company published a story about Regus titled ‘Office of the Future,’ highlighting its efforts to bring ‘community’ to the workplace. But the bubble burst and Regus went bankrupt. The company recovered and rebranded as IWG, but its existence presents another conundrum for WeWork. IWG currently has roughly 3,000 locations and 2.5 million customers worldwide, numbers that dwarf WeWork’s. IWG is profitable and now has a hipper, WeWork-ish offering. It is publicly traded and worth around $3bn.”
The American Affairs Journal article, Uber’s Path of Destruction, started: “Since it began operations in 2010, Uber has grown to the point where it now collects over $45bn in gross passenger revenue, and it has seized a major share of the urban car service market. But the widespread belief that it is a highly innovative and successful company has no basis in economic reality.
“An examination of Uber’s economics suggests that it has no hope of ever earning sustainable urban car service profits in competitive markets. Its costs are simply much higher than the market is willing to pay, as its nine years of massive losses indicate. Uber not only lacks powerful competitive advantages, but it is actually less efficient than the competitors it has been driving out of business.
“Uber’s investors, however, never expected that their returns would come from superior efficiency in competitive markets. Uber pursued a ‘growth at all costs’ strategy financed by a staggering $20bn in investor funding. This funding subsidised fares and service levels that could not be matched by incumbents who had to cover costs out of actual passenger fares. Uber’s massive subsidies were explicitly anticompetitive—and are ultimately unsustainable—but they made the company enormously popular with passengers who enjoyed not having to pay the full cost of their service.”
Criticism of any highly-valued company is part of the greater scrutiny expected as their impact on society and the economy grows and Uber and WeWork (owned by parent The We Company) have delivered on the high revenues investors wanted and this still remains a factor in valuations on public and private markets.
Both Uber and WeWork have also been active in trying to develop their innovation strategies around their core markets. Uber last month bought Mighty AI, an autonomous vehicle developer backed by GV, a corporate venturing unit of Alphabet formerly known as Google Ventures, while WeWork has acquired Teem, Euclid, Managed by Q and Waltz in the past year.
Loss-making companies that have floated have beaten the stock market by around 9% year-to-date, even though historically they have typically underperformed by a similar amount, on average, according to fund managers Schroders.
Frank Thormann, manager in Schroders’ research note, said: “I consider this current environment as anomalous, and the market has gravitated towards a different kind of company. At the same time, investors should remember that mean reversion is a powerful force. Sentiment could change quickly in favour of profitable and cash-generative companies.”
Until then, Lerner said: “There are certainly still any unicorns [private companies valued at least $1bn] out there, so there is no shortage of privately held companies that have an appetite (whether deserved or not is a matter for debate) for large cheques from private investors.”
Janeway agreed and added: “Given the likelihood that the financial environment will remain very loose for the foreseeable future, I expect there will continue to be continuing opportunities for corporate VC to do the sorts of deals of the last several years. Whether this is optimal for the sponsoring corporates is a very different question.”