Over the past decade, limited partners have plowed ever-greater allocations into the venture capital market in a quest for stellar returns. And now those returns are finally poised to roll in.
Waves upon waves of hefty distributions by venture funds are coming due as a result of an exit landscape that has never been richer and more active. For the past couple years, VC-backed companies have been going public or getting acquired in greater numbers and at vastly higher values in aggregate.
One of the most striking takeaways about today's venture ecosystem is that its ability to pump out record-breaking yearly totals may be the new normal, at least for the next few years. It's the legacy of the past decade's unicorn boom, which produced technology IPO darlings like Airbnb and Snowflake last year, followed this year by even larger mega-exits from the likes of Coinbase, Roblox and (expected in the coming weeks) Robinhood.
The road from Silicon Valley to Wall Street certainly is seeing a lot more traffic, and the cars taking that route are getting much glitzier and more expensive.
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Given the potential deals in the pipeline, all signs are pointing to a sustained run of richer exit years for some time going forward, barring a market correction. Liquidity could be massive, as there are still 181 VC-backed unicorn companies that were founded 10 or more years ago.
"It's always hard to predict, but the secular tailwind is so strong right now for tech," said IVP general partner Eric Liaw, whose firm is an investor in Robinhood. The stock-trading company, which disclosed IPO plans earlier this month, reportedly could be valued at $40 billion or more in what will be one of the most closely watched debuts of 2021.
Last year, according to PitchBook data, total VC exit value in the US scored a new high of some $287 billion, led by the public debuts of Airbnb (with an IPO valuation of over $40 billion) and Snowflake ($33 billion).
Surely that's a whopper of a year for exits by any stretch. We now know, however, that last year's bonanza was merely a taste of things to come: In this year's first half alone, the exit market has already blown away last year's record, with $372 billion in total value, the latest PitchBook-NVCA Venture Monitor reported.
To be sure, this year's early exit bounty reflects the outsize public offerings by crypto-trading specialist Coinbase (valued at over $85 billion out of the gate in April) and online game platform Roblox (nearly $42 billion in March). But even without those two dominant performances, the total exit value for the class of 2021 is 85% of last year's total—well on its way to crushing the previous record.
IPOs, not acquisitions, are the main force at work. Most of the top-value exits in Q2 were from companies going public, according to PitchBook data.
This is all in stark contrast to the scene just a few years ago, when the IPO market was mired in a dry spell even as billion-dollar companies were being minted at a growing clip.
Relatively few VC-backed companies were going public back then because they had plenty of fundraising alternatives. Following the landmark IPO by Facebook in 2012, vast sums of capital began chasing venture deals, as mutual funds, giant asset managers and corporations flocked to the asset class. And lofty valuations became more common—seemingly out of nowhere: In the year after Facebook's IPO, 23 new unicorns emerged globally; by 2018 the yearly total had leaped to 142, PitchBook data shows.
Companies founded in those years are the ones forming the big waves of today's IPO market.
It's not just massive deals like Coinbase and Roblox that tell the story. The number of exits in the US has also been trending higher, and is likely to set another record this year; the first half's 883 deals already represent 75% of the all-time yearly high, set in 2019.
Of course the SPAC effect must be acknowledged. The flood of newly created blank-check companies seeking to take private companies public has been a significant factor on the acquisition front, accounting for 34 of the 123 public offerings through June 30, after 33 such deals were done in all of 2020.
Fittingly, one of those reverse-merger deals was the vehicle that will allow WeWork to make its own long-awaited journey to Wall Street. A SPAC called BowX Acquisition Corp. agreed in March to take the SoftBank-controlled shared-office provider public at a $9 billion valuation. However, that's a fraction of the $47 billion WeWork commanded just before it was forced to scrap its market debut almost two years ago.
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