The Venture Capital Exit Market

22nd November 2017  

by Francesco Terraneo, Marketing Assistant at U-Start



INTRODUCTION – WHAT IS AN EXIT?

An exit could be defined as the company shares’ sale by the founder or by an investor aiming to make a profit. In the United States VC ecosystem, "exit" is already a fundamental voice in the start-up's pitches and it’s frequently included in the drafting of the first business plans. But how can an exit be made? Start by saying that an exit is not always positive and that could also be partial, there are 5 main methods to do it:

-    M&A: a merger or an acquisition of similar companies. In the first case, one company is incorporated in the other one. In the second case, a company becomes the owner of a controlling interest in the other one. M&A can be either hostile or win-win situation for both companies, such as the case of Facebook's acquisition of WhatsApp.

-    Change of the controlling shareholder: differentiates from the M&A as the acquisition is made by a physical person. It’s only a change of ownership. It’s, for example, the case of UFC (Ultimate Fighting Championship) bought by the entrepreneurs Frank and Lorenzo Fertitta.

-    IPO (Initial Pubblic Offering): is the act by which a company is traded for the first time on a regulated market, offering a part of its shares (the so-called floating capital) to the public. Twitter, not listed on the NYSE, did an IPO.

-    Secondary transaction: a founder or an investor (who typically joined a Seed or A Series round) sells a portion or all of its shares in a later round to other investors. The Secondary transaction it’s a very typical practice of the VC ecosystem.

-    Winding-up and closure: it’s a negative exit with no incomes for investors. It’s due to a bad business structure with a high and not-auto-sufficient financial need. 

 

LOOKING AT THE BIG PICTURE OF THE GLOBAL VC BACKED MARKET

As shown by the graph (figure 1) included in the KPMG Enterprise's Venture pulse report Q4 2016, the number of exits made by Venture Capital companies increased with an average annual growth rate of 9.7%, from 1,142 in 2010 to 1,810 in 2014. In the same period, the exits value increased too, going from $44 billion in 2010 to $114 billion in 2014, when WhatsApp was acquired by Facebook for a value of $22 billion (the largest M&A deal in the history of Venture Capital). After the acquisition of the most used app in the world, the exit trend has undergone an inversion in the number of deals, reaching 1283 deals in 2016, the lowest value in the last four years. From the point of view of the exit value, it is true that it decreased in the triennium 2014-2016, going from $114 billion to $69 billion. But without considering the $22 billion’s outsider WhatsApp from the total of 2014, the trend remains constant, verifying only a slight negative change. In any case, it remained always higher than in the previous years.

Figure 1: Venture-backed exits worlwide (2010-2016)

Source: Venture Pulse, Q4 2016 - KPMG ENTERPRISE

In the top five of the global areas with the highest number of exits in terms of deal and valuation in the ecosystem of Venture Capital, we find first - as easily imaginable - the United States, followed by Europe, China, India, and Israel. What these countries have in common is that most of the exits have been done via M&As (figure 2). Considering the IPOs, there is a large gap between the number of quotations and the value of them, with respect to the number and value of M&As. This means that not all the companies are large enough to be listed on the stock exchange, but the few that achieved this goal are able to do high valuation exits. Concluding the overview, it is interesting to report that, even if the number of unicorns decreased in 2016 compared to 2015 (passing from 83 unicorns to 25) the number of + $1 billion exits has increased: from 11 exits in 2015 to 18 in 2016.

 

Figure 2: Kinds of exits worlwide

Source: Venture Pulse, Q4 2016 - KPMG ENTERPRISE

 

SUCCESSFUL UNICORNS

Dollar Shave Club: founded by Mark Levine and Michael Dublin in 2011, DollarShaveClub.com sends a set of razor blades and other high-quality products for the personal care to its members for just $1. After raising $164.5 million in six different funding rounds by 24 investors (including TCV, Founder Circle Capital, and Venrock), the company has been acquired in July 2016 by Unilever for $1 billion.

Jet.com: founded by Marc Lore (previously founder of Diapers.com, acquired by Amazon) Nate Faust and Mike Hanrahan in July 2013. Jet.com is an online retailer that thanks to logarithms able to change prices, based on the origin and the number of products purchased, makes the prices much more competitive than its competitors do. Jet.com raised The company $570 million from 19 investors in 5 rounds of funding (among the investors, Alibaba Capital Partners, Accel Partners, and Goldman Sachs) and was then acquired by Walmart in 2016 for $3.3 billion.

Skyscanner: founded in 2003 by Barry Smith, Bonamy Grimes, and Gareth Williams, Skyscanner is a website to find the best flights offers all over the world. The online platform also offers to its users the possibility to rent cars and pre-book hotels, depending on the destination of their flights. After raising $197.2 million in three rounds of investment from seven investors (including Sequoia Capital and Scottish Equity Partners), Skyscanner was acquired by Ctrip in 2016 for $1.7 billion.

 

THE EXIT MARKET

Below, it will be analyzed the American and European VC markets who cover the first two positions of the Top 5 Exit mentioned above. The article analyses the two areas one by one using equal benchmarks: exits amount, value and developments (in terms of M&As and IPOs) over time (2010-2016).

IN THE STATES

The following two graphs (figures 3 and 4) show the exits trends in the United States in 2010 – 2016. The first figure shows that the number of exits from 2010 to 2014 has continuously grown, with an average annual growth rate of 7.85%. Then a downwards phase is started and in 2016 the market reached 750 exits in 2016 (lowest value of the previous six years).

Considering the cumulative value of the exit in the US, it can be said that, unlike the number of deals, it has not undergone significant changes. The only exception happens in 2014 when, as we already said, WhatsApp has been acquired by the social media giant Facebook. So, even if the number of deals has decreased, the value remained constant.

The most-performed exit type in the US in the period considered, as shown in figure 4, is M&A. From the IPOs point of view, it is interesting to underline that, in 2012, the value raised in the public market was almost equal to the value raised with strategic acquisitions in the 2013 private market. What changes is that in the private one there has been about ten times more deal than in the public one. Lastly, from the point of view of both acquisitions and IPOs 2016 has been the worst year of the last seven years.

Figure 3: Exits number and valuation in US

 

Figure 4: Kinds of exits in US

Source: Venture Pulse, Q4 2016 - KPMG ENTERPRISE

 

IN EUROPE

As the figure 5 shows, the amount of exits in the European Venture Capital ecosystem has increased by an average annual 7.93% growth rate in the period 2010-2013, then accelerating with 35.94% growth rate reaching up to the maximum point of 522 total deals in 2014. The value then remained almost constant in the year after, decreasing significantly in 2016 and reaching 374 deals. Instead, the exits value has followed a different path compared to the number of deals: it has remained constant from 2010 to 2013, when the valuations tripled, and then underwent small changes until 2016, where a total valuation of $13 billion has been reached.

Focusing on the typology preferred by the European market to do exits, the figure 6 illustrates that, as for the US, the M&A market is the most appreciated by far.

Figure 5: Exits number and valuation in Europe

 

Figure 6:  Kinds of exits in Europe

Source: Venture Pulse, Q4 2016 - KPMG ENTERPRISE

 

US VS EUROPE: WHO IS GONNA WIN?

The American VC ecosystem is five times larger than the European one, it has three times more deal and values in the order of tens of billions. It so seems to be the winning one. Is Europe destined to remain in the shadow of its American competitor?

Actually, we still have some hope. The European VC ecosystem owns a value with which manages to overcome the States in the exit race and it is not a little thing. In the period 2011-2015 the Old Continent was infact the most efficient in terms of invested capital. It means that the ratio between exits value and invested capital was averagely higher in Europe than in the United States. In other words, we achieved a greater return on the single dollar invested in VC.

From the graph below (figure 7), the result of an analysis carried out by CBInsights on the efficiency of invested capital (calculated as total exit value/total funding): it’s notable that, although Europe enjoys a lower number of investments than the US, they are significantly more efficient, reaching away more high multiplier of 18.56x than the 8.14x America’s one.

Figure 7: Efficiency of invested capital worldwide

Source: CB INSIGHTS

 

CONCLUSION

Thinking globally, the value and number of exits have increased over time. Observing the progress of successful cases and the ecosystem of Venture Capital in continuous expansion, it can be hypothesized that the trend will still grow in the future, especially for IPOs and M&As.

Regarding the exits supremacy, the United States inevitably - due to their size, their financial structure and their greater openness to Venture Capital - will always have a scale advantage in terms of numbers obtained. However, Europe has shown that returns can be achieved not only through the "law of large numbers", but also through the right capital allocation. In other words, through the efficiency of invested capital. Continuing to allocate capital effectively, Europe could be able to get out of the shadow of the States and compete for the conquest of the global Venture Capital podium.

 

CASE STUDY: A SUCCESSFUL IPO - Nutanix

Founded in 2009 in San Jose, California by Dheeraj Pandey, Mohit Aron, and Ajeet Singh, it is the first company to offer an easy-to-use storage and compute infrastructure - called hyper-converged infrastructure (HCI) - with which businesses are able to implement their virtualization in a simple and economical way. The products offered by Nutanix, such as Prism and Acropolis, are built with the same techniques used in Google's basic systems and they can organize data in the order of Petabytes (1 Petabyte corresponds to 1 million Gigabytes.) Google uses 24 Petabytes daily of data and simultaneously manage thousands of virtual machines.

Two years after its foundation in 2011, Nutanix began its path through the world of Venture Capital, collecting in just a few years $312.2 million of funding raised by 14 investors in seven different rounds, starting from Series A, up to Series E in August 2014 (where it raised $140 million). Among the lead investors of the various rounds, we find Khosla Ventures, Sapphire Ventures, and InstantScale Ventures.

The managerial skills of the top management and a portfolio of several customers of the order of L'ORÉAL, Honda, AT & T and NASDAQ were the two elements with which Nutanix back in 2013 was able become a unicorn, breaking the barrier of $1 billion valuation. Two years later, in December 2015, despite it achieved a tax loss of $126 million, Nutanix filed its IPO application. The IPO was executed on September 30, 2016, at a price per share of $16.00.

Thanks to a $2.2 billion IPO valuation, $238 million raised by the public offering, the 131.5% increasing share price to one day of listing, and the appointment among the Top IPOs of 2016, Nutanix is a good example of Venture-Backed exit where investors obtained high revenues.

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