Venture Portfolio Management ‌In the Age of the Unicorn
Venture is back. Performance is recovering after a challenging period. U.S. Venture Pooled IRR
Top Quartile vs. Median Venture IRR
40%
85% 1,178 bps
35%
70%
30% 55%
25% 20% 15%
40% 1,049 bps
25% 314 bps
10%
10%
5% 0%
-5%
5 Year
10 Year
2009
2014
Source: Cambridge Associates. Measured as of 9/30/09 and 9/30/14.
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20 Year
1981
1985
1989
1993
U.S. VC Top Quartile Source: Cambridge Associates as of 9/30/14.
1997
2001
U.S. VC Median
2005
2009
Thanks in part to strong venture-backed IPO and M&A activity over the last few years‌ Announced IPO $ Volume
Announced M&A $ Volume
$450 $400
Volume ($B)
$350 $300 $250 $200 $150 $100 $50 $0 Announced # of Transactions
2009
2010
2011
2012
2013
2014
M&A
436
596
574
510
481
531
IPO
8
47
46
50
74
105
Sources: Dow Jones, FLAG internal analysis. IPO volume reflects market capitalization at time of IPO.
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‌which has led to distributions. The industry is returning more capital than it’s calling. (Finally). U.S. Venture Capital Industry: Cash Flows $25 $20
($B)
$15 $10 $5 $0 -$5 -$10 2001
2002
2003
2004
2005
Contributions Source: Cambridge Associates as of 9/30/14.
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2006
2007
2008
Distributions
2009
2010
2011
Net Cash Flow
2012
2013 YTD 3Q 2014
The challenge: venture takes time. 2003 is the last vintage year the top quartile reached 1x DPI. VC Top Quartile Distributions to Paid-In Capital (DPI): Time to 1x Pre-Bubble
Number of Years to Reach 1x DPI
15
Bubble
“Nuclear Winter”
12 9 6 3 0 1981
1983
1985
1987
1989
1991
7-Year Avg. Source: FLAG analysis of Cambridge Associates data as of 9/30/14.
5
1993
1995
1997
4-Year Avg.
1999
2001
2003
12-Year Avg.
2005
2007
2009
2011
‌In part because the winning companies are staying private longer. Increasing Average Time to Exit for Venture Capital-Backed Companies 10 9 8
7.5 year average
Years to Exit
7
6
5.3 year average
5 4 3 2 1 0
1995
1997
1999
2001 To M&A
Source: Dow Jones as of 12/31/14.
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2003 To IPO
2005 M&A Averages
2007
2009
IPO Averages
2011
2013
Resulting in more value accruing to private investors. (…and early-stage investors benefit most of all.) Public Investors
Private Investors
Primary beneficiaries of valuation increases in past cycles
Primary beneficiaries in capturing the value this cycle $104.2B
Market Capitalization at IPO ($B)
$100 $25 $20 $14.2B
$15 $10 Current market cap: $5 $0
$150B
$175B
$350B
$0.2B
$0.4B
$0.8B
Cisco
Amazon
Microsoft
Earlier Tech Cycles Sources: Quigley Report, FLAG internal analysis, public filings/news search. Data as of 3/10/15.
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$4.3B
New Tech Cycle
Even so, the time to 1x DPI appears to be shortening. The industry is recovering from the “nuclear winter.” Top Quartile DPI Progression by Vintage Year
Post-2003 DPI by Vintage Year 1.6x
VY ‘92
3.5x 3.0x Trends in more recent vintage years showing quicker paths to 1x
2.5x 2.0x
VY ‘03
1.5x VY ‘07
1.0x VY ‘09
0.5x
1.4x 1.2x
2005-2007 Vintages closing in on 1x DPI
1.0x 0.8x 0.6x 0.4x 0.2x 0.0x
0.0x 0
1
2
3
4
5
6
7
Years Since Inception Source: FLAG analysis of Cambridge Associates data as of 9/30/14.
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Distributions to Paid-In Capital (DPI)
Distributions to Paid-In Capital (DPI)
4.0x
8
9
10
11
2003 2004 2005 2006 2007 2008 2009 2010 2011
And a growing backlog of unicorns* suggests a bright future ahead for distributions.
$2-5B Valuation
$5-40B Valuation
$40-50B Valuation
Beibei CloudFlare Credit Karma Eventbrite Evernote Farfetch Good Technology Grabtaxi Home24 Honest Co. InsideSales.com JustFab Kabam Lookout Mogujie Ola Cabs Qualtrics Razer Shazam Shopify SimpliVity Tango Yello Mobile Actifio AppDynamics Gilt Groupe IronSource Next Door Proteus Digital Health Slack AppNexus Automattic Fab Social Finance Sunrun Deem Jasper Technologies Koudai Shopping Adyen DocuSign MongoDB Intarcia Therapeutics Delivery Hero Coupang Dianping Instacart Magic Leap Nutanix Snapdeal Trendy Group Houzz InMobi Lyft Powa Kuaidi Dache Bloom Energy Legendary Entertainment Moderna Pure Storage VANCL Fanatics Jawbone Didi Dache Stripe Spotify Cloudera Pinterest WeWork Square Meituan Theranos Airbnb Dropbox Flipkart SpaceX Palantir Snapchat Uber Xiaomi
$1-2B Valuation
* Unicorns defined as private companies valued at $1 billion or more by venture capital firms. Sources: Dow Jones VentureSource and The Wall Street Journal. Valuations as of March 2015. Note as per the WSJ: This chart only includes companies that are privately held, have raised money in the past four years and have at least one venture capital firm as an investor. Excluded from this list are companies that were majority-controlled by an institutional investment firm at one point. Only valuations confirmed by VentureSource or The Journal are included, based on direct investments, not secondary deals.
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Or does it? We love the unicorns and are rooting for them. But are there really over 80 true unicorns?
Maybe‌ Maybe Not. 10
So should VCs be hedging their bets? And should LPs be encouraging them to do so? Why take some chips off the table… ■
Prudent way to de-risk the investment & fund
■
Capitalize on current valuation environment
■
Risk of being disrupted by the next innovator
■
Company value might not continue to grow at target rate of return
■
Emerging firms may see opportunity to put “points on the board”
Note: Represents the opinion of FLAG Capital Management, LLC.
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Or, should VCs swing for the fences? So far, most are doing just that according to FLAG.
56
Why continue to hold…
Unicorns
FLAG portfolios have 56 unicorns, representing 100+ exposures across multiple fund investments
27% 27% of funds have realized 1x cost (or more) in deals that are valued at 10x+
■
It’s a “hits” business…duh
■
GPs motivated to maximize multiple (vs. IRR)
■
May not move the DPI needle… do LPs care?
■
Holding all of a “sure bet” may be better risk/reward and maximize impact on fund returns
■
Company value is expected to grow at target rate of return
■
Private market secondary sale runs counter to VC’s “go long” ethos
Sources: FLAG internal analysis. Last round pricing data based on WSJ and FLAG data estimates of pricing data is based on Wall Street Journal and FLAG analysis. Note: Represents the opinion of FLAG Capital Management, LLC
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At FLAG, we believe that exceptional VC managers make great investments and excel at portfolio management.
We believe very few are good at the former‌
‌and even fewer are good at both.
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FLAG Capital Management, LLC 1266 East Main Street, 5th Floor Stamford, Connecticut 06902 Phone: (203) 352-0440 Fax: (203) 352-0441 One Beacon Street, 23rd Floor Boston, Massachusetts 02108 Phone: (617) 557-0028 Fax: (617) 557-0029 FLAG Squadron Asia Limited Unit 406, 4/F St George's Building 2 Ice House Street Central, Hong Kong Phone: +852-3756-0700 Fax: +852-3756-0701 Email: Website:
flag@flagcapital.com www.flagcapital.com
The information set forth in this document shall not constitute an offer, solicitation or recommendation to sell or an offer to purchase any securities, investment products or investment advisory services. Such an offer may be made only to qualified investors by means of delivery of a confidential private placement memorandum or similar materials that contain a description of the material terms of such investment.
Any statistical information contained herein has been supplied for informational purposes only and is not intended to be and does not constitute investment advice or an opinion regarding appropriateness of an investment in any FLAG fund. While FLAG Capital Management has not independently verified the accuracy of the statistical information contained herein, all such information has been obtained from sources believed to be reliable.
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