What is in store after a transformational year in 2014? [Contributed by Mike MacKeen, Originally Published on Raising the Next Round | Bulger Partners]2014 was a banner year for tech companies raising growth equity in the private market. Investors committed $74B to drive growth and provide liquidity. At least 21 new companies joined the “Unicorn” club with valuations in excess of $1,000,000,000. Uber raised capital late in the year at a $41B value, a market cap that would rank it 32nd among all NASDAQ listed companies were Uber public. The private market universe expanded with mutual funds, hedge funds and corporate investors increasing their private portfolios. Marc Andreessen and Bill Gurley began to raise alarm bells about the market and company burn rates overheating.So how does a company considering raising funds plan for 2015?Key questions emerge from the 2014 results. Is there a private tech bubble? Have the private markets replaced permanently the public markets as the default source of growth equity? Will the newly active corporate and crossover investors exit private investing at first sign of a bear market? Are the Unicorns market bellwethers that will become valuable public companies or Pets.com version 2.0?Growth Equity Will Stay Strong in Early 2015I believe that, absent unexpected political events, the market for raising growth equity will stay strong for at least the first half of 2015. Having participated in the dot com bubble, I do not see in today’s market the same behaviors that created the last tech crash. Public market investors are focusing more on profit margins. Companies coming public have greater scale providing the ability to trim cost and weather economic cycles. Private equity and corporate coffers are full, providing a willing buyer set if asset values fall during the year.CEOs considering a capital raise in 2015 may want to accelerate their plan into the first half to capture a favorable market. The core factors for continued access to capital for good late-stage growth companies are:
- Strong supply of capital
- Stable equity markets
- Healthy liquidity environment (IPO and M&A)
These factors are in place now and should remain in place, at least for the first half of the year with stability at the greatest risk of change. A quick review of the drivers:Supply – Growth equity investors have fresh capital to invest. The tech-focused venture and PE funds we track raised $247B last year in new funds following a healthy 2013 in which they raised $263B. Institutional Investors allocated more capital to alternative assets, as two years of rising public equity markets required rebalancing of portfolios to maintain target allocation to PE and venture. While some of the increase was allocated to the healthcare sector, successful 2012 and 2013 tech exits like Twitter and WhatsApp attracted alternative investors to tech.Stability – Investors can commit capital more easily when a stable sense of pricing exists. With the NASDAQ trading at a forward P/E of 22 and the Dow trading at 15, the markets are in line with historic norms, reducing the likelihood of a 2001 style market selloff. In addition to relative value, volatility is modest. The VIX index, a measure of equity volatility, remained below 15 for most of 2014 and only broke 20 three times. It is an easier market in which to value shares than 2010 or 2011 when the VIX remained above 25 and rose above 40 several times.Liquidity – Growth equity investors are influenced most directly by the tech IPO and M&A markets. When investors have confidence there is an attractive market to provide them future liquidity they are more aggressive in committing capital. The Tech IPO market had a successful 2014, even absent the massive Alibaba offering. Tech issuance volume was up 33%. Successful tech offerings from GoPro and Zendesk topped the IPO returns list, keeping tech of interest to public investors. The 2015 pipeline is robust with possible offerings rumored from companies such as Box, GoDaddy, MongoDB, AppNexus and Nutanix. The tech companies expected to come to market have raised material capital as private companies, allowing them to achieve increased scale prior to listing. This scale increases the chance of successful offerings and post-offering trading performance, in turn incenting private investors to continue aggressive growth equity commitments.The tech M&A market should also remain robust. The core consolidators in tech are all healthy, with none currently sidelined integrating massive acquisitions. Cash balances across the industry remain high. The diverse solution vendors such as IBM, Oracle, H-P, Microsoft, Cisco and Salesforce will remain acquisitive adjusting product portfolios to customer demand. Key trends that will drive behavior include the continued migration to cloud infrastructure, the increased digitization of enterprise sales and marketing functions, the continued need to improve data security and Big Data opportunities created by the Internet of Things. These vendors can pay attractive acquisition multiples that will encourage growth equity investors to continue to be aggressive.Beware the FedWhat could change the outlook? The least predictable of the factors is market stability. The US Federal Reserve now seems committed to trying to raise interest rates during the year. How the Fed executes the adjustment and how it is received in both bond and equity markets is likely to increase volatility. The Fed negatively impacted the social media and biotech sectors with hostile opinion in The Biannual report this past July. It is possible we will see similar future commentary with adverse effect. For this reason we have less confidence in Q3/Q4 market stability and encourage interested companies to consider executing any planned capital raise in the first half of 2015.The market can’t be predicted and Bill and Marc are right to be concerned about some of the burn rates funding all those SXSW events. But the growth equity market is healthy and we expect it to continue offering attractive terms for companies with scalable models, happy customers and great teams.