The private market is so healthy that even Silicon Valley journalists are publishing the “B” word (“Bubble”, not the one that rhymes with rich). The robust private market has made the tech IPO an after thought; so much so that we are headed for the lowest issuance since 2009. The chart below highlights how the Unicorn wave is so strong that 41 private companies raised illiquid private rounds ABOVE where Box priced its initial public offering in a liquid market at a very respectable SaaS multiple of about 7.5x run rate revenue.
Are we in a bubble? Journalists are hitting the Wayback Machine and dusting off old S-1s to find Year 2000 metrics we can compare to today’s market to answer the “Bubble / No Bubble” question. In all the looking backward, they might have missed the reality of today’s market.
Uber and its Unicorn friends generate much attention, but they are far from the totality of the market. They are not even a representative sample. The 60 or so Unicorns are a tiny minority of the 3,800 or so tech companies that CB Insights tells us raised money in the private market over past year.
The supernova of buzz from the Unicorn and Deca-corn minority is hiding an underlying trend: private market activity, excluding the mega rounds, is actually decreasing. We extracted the capital raised by the current independent class of unicorns from the market numbers to reveal that, while still quite healthy, Q1 funding was down by $700M or about 9.4% over the prior year.
We are still in a healthy market. Cooley’s venture data affirm that 90% of all Q1 rounds they tracked were “up” rounds. Company formation is high; Series A rounds as a percentage of total financings were 48%, a healthy amount that is above the two year quarterly average of 40%. However, quarterly financing volume is down 20% from the Q2 2014 peak and our analysis that excludes the “Unicorn effect” suggests the last two quarters of total capital invested are the lowest since 2012.
Companies with good metrics can get funded in most markets. However, if you are a CEO preparing to raise capital, you should realize there is a disconnect between the headlines on VentureBeat and what you may find in the market. If supply has tightened a bit, you need to be certain your story and forecasts are in top shape. You will likely need to allocate more of your time than expected to the process and perhaps cast a broader net than planned. We are in a healthy market, but when it comes to Unicorns and bubbles, do not believe everything you read.
Update: This presentation from Scott Kupor of a16z suggests the same trend – Unicorn fundings are masking a private market that is healthy, but not overheated.