Startup Exits, Valuations Decline in First Half 2016, Reports Find

After an extremely strong venture capital market in 2015, the industry seems to show the signs of a decline driven by both cautious and fatigued investors. Three recent studies from Pitchbook and CB Insights indicate that there are several reasons why venture capital firms and other investors have been more cautious so far in 2016 including: mixed economic growth numbers; a volatile political climate; and, more security in private markets.

The long-term effects of those trends can be seen in the findings of these reports including:

• Most tech companies are exiting for less than $50 million, according to a recent report from CB Insights – The H1 2016 Global Tech Exists Report;
• Early stage pre-money valuations have dropped by 6.2 percent from 2015’s 10-year high average valuation high of $40.1 million in the first half (H1) of 2016, according to a study from Pitchbook – 1H 2016 VC Valuation Report;
• Unicorns – startups with $1 or more billion valuations – have declined from 43 in 2015 to only 11 through the first half of this year, according to Pitchbook’s 2016 VC Unicorn Report.

As VCs and other investors move to late-stage, “safer” investments, the industry will see more market concentration in only a handful of high-growth companies and a lack of capital for early stage and/or less high-growth potential companies. In the two Pitchbook reports, the authors’ analysis of valuations found that many of the unicorn valuations were for companies in much later stages of their life cycle than in the past. Pitchbook also found that most of the declines in valuations were due to a more volatile early stage investment ecosystem while late-stage numbers continued to remain relatively resilient in the face of declines.

Similar to the findings from Pitchbook, CB Insights highlights the declining trend of exits. CB Insights found there were only 1,591 exits – 1,564 mergers and acquisitions (M&A) deals and 27 initial public offerings (IPOs) – compared to 1,910 exits (1,864 M&A deals and 46 IPOs) in H1 2015. Many of these exit decisions are driven by the current investment climate. For companies that traditionally would have considered an IPO, including many unicorns, the availability of investment capital and other forms of capital makes IPOs significantly less appealing especially because of the cost/challenges of an IPO. This increased availability of capital can be attributed to many investors, especially institutional investors/lenders, withdrawing from the public markets and focusing their investments on late-stage companies with high potential for return on investment.

For other startups without unicorn potential, the lack of early stage capital and concentration to a small number of potential unicorns may be driving many companies valued at less than $50 million to consider an M&A deal.  As the CB Insights report highlights, many of the nation’s largest tech companies – IBM, Microsoft, Intel – are benefiting greatly from this trend by making several M&A deals for companies that may lack the ability to grow to become unicorns or otherwise have limited interest from private market investors.