Valuations in venture capital are at record highs—and it doesn’t look like things will change in the near future. Many deals in 2018 have been closing at double-digit enterprise-value/EBITDA multiples, while the global M&A median stands at 9.3x for the year. In other words, the median enterprise value for companies currently being acquired is 9.3 times its EBITDA (earnings before interest, taxes, depreciation and amortization). If you are a corporate development professional, you have likely felt the effects of high valuations on your work. But, how did we get here and what factors are influencing this high-priced environment?
Record levels of dry powder help drive acquisition multiples up
The answer is not so simple, as a number of factors and external forces are working together to influence this notable increase. One major force helping to drive prices up is the record levels of dry powder available to PE and VC investors. With nearly $1 trillion of committed capital available to firms worldwide, investors are under pressure to put that capital to work. Further, high levels of cash on corporate balance sheets contribute to this environment of readily available capital. In addition to a desire to spend available money, a fund manager’s own payment (in the form of performance or management fees) is often based on capital that has been invested. Further, an abundance of money to spend means that some investors may be willing to pay higher prices than they otherwise would, spurred on by a competitive environment.
Public company inventory continues to decline
Another factor to consider is that the number of publicly listed companies in the United States is going down. This can partially be attributed to private companies taking longer to go public, but other factors include widespread consolidation and an increasing willingness and ability for large companies to operate privately. Over the last two decades in the United States, the number of public companies has dropped roughly 45 percent (going from 7,905 in 1997 to 4,336 in 2017). This drop challenges deal flow, especially for entities which have traditionally looked to public markets for deal sourcing, including larger fund managers and strategic acquirers.
Despite the limited inventory, corporate development teams remain heavily involved in acquiring public companies. So far in 2018, 17 of the 20 largest public company acquisitions were completed by strategic acquirers. Such a high proportion shows just how much appetite corporate development teams have for acquiring the right targets—even with the high prices.
More companies choosing to stay private longer as funding also increases
In the context of venture capital this means more companies are likely to continue raising additional financing from venture or nontraditional investors. Staying private longer and raising larger rounds, private companies are acquiring greater levels of funding into later maturity than before. As an example, when it was all said and done, it took Spotify roughly 10 years to finally go public via a direct listing.
Not only are valuations high, they are rapidly increasing. For example, the median valuation in late-stage rounds has increased a staggering 50.7 percent year-over-year (as of 3Q 2018). But it’s not just late stage VC that’s seeing significant jumps, the median early-stage valuation increased 27.5 percent while angel and seed deals saw a notable, yet relatively smaller 11.8 percent uptick.
Nontraditional investors injecting massive amounts of capital into VC
Beyond competition from an increasing number of VC and PE firms, nontraditional investors have further complicated matters by introducing tons of capital into VC (and the tech ecosystem in particular). This is also a contributor to the previously mentioned 50.7 percent year-over-year jump for the median valuation for late-stage VC deals. Just one example of a nontraditional investor changing the landscape is SoftBank’s behemoth $98B Vision Fund.
At a whopping $98B, Softbank’s fund is the largest VC or PE vehicle in history, significantly larger than even the previous largest vehicles (which hovered around the $20-25 billion range). The company explained the vehicle’s size as a way to invest in the next stage of the “Information Revolution” that they say will take unprecedented long-term investment. The fund’s minimum investment is $100 million in capital and has thusfar invested in major players including WeWork ($4.5B altogether), Slack ($677M altogether), Uber ($9.25B altogether) and many more.
Though this influx of capital undoubtedly has an impact, it’s just another in a series of factors contributing to higher valuations. With record levels of available capital, an ever-increasing competitive field and a fierce bidding market, acquisition multiples are rising. To find the right opportunities amidst a sea of high prices and successfully compete, corporate development teams will have to continue refining their approach.
