We recently hosted a webinar with NVCA, Silicon Valley Bank, Perkins Coie and Solium about what lies ahead for venture capital. Read what the experts had to say through our Q&A.
We were joined by:
Buddy Arnheim,
Co-Chair, Emerging Companies & VC Practice, Perkins Coie
Bob Blee,
Head of Corporate Finance Group, Silicon Valley Bank
Kevin Swan,
Vice President, Corporate Development, Solium
The following excerpt has been edited for length and clarity.
PitchBook: Given record-breaking activity in 2018, do you anticipate deal activity going higher from here? Or do you expect a little bit of a cool down coming ahead?
Kevin Swan: I can definitely see both sides of this. It’s not unreasonable to take the position that deal activity just can’t keep going higher and has to decrease at some point. On the other hand, it’s hard to identify what factors are necessary to result in a decrease to deal activity. The average size of deals continues to increase, and mega-rounds are contributing to high levels of capital being deployed, while increased competition has driven activity in the top end of the market.
I think there’s a strong consensus that a bit of a cool down would be healthy for the industry, but it’s almost as if the broader dynamics just won’t let this happen. At this point, the only thing that could really change things is a shift in macro factors like the rise of interest rates, a significant downturn in the public markets or a global recession.
Buddy Arnheim: To add to that, we saw most if not all the gains from 2018 erode over the last quarter and we’re already seeing further erosion, for example Nvidia’s earnings and the impact of tariffs in China. This sort of instability can impact late-stage mega-rounds, at least.
Public market valuation suppression could ripple through the early and mid-stages over time. At the same time, a huge amount of capital has been raised that needs to be deployed, which will likely buffer some of the impact that volatility in the public markets could have on these private company investments.
PitchBook: What impact do you think mega-deals and mega-funds will have in the coming year?
Buddy Arnheim: I think there is a bit of uncertainty regarding how mega-deals and mega-funds will play out. Many of us view them as a new experiment in the market.
As public markets have been less receptive to earlier stage deals and require more gestation of businesses to then allow them to access capital markets, mega-funds have come in and provided that late stage capital. My suspicion is that will continue this year, but it could be challenged based on what we’ve seen in the public markets for new entrants.
Still, if the IPO market stays robust, I think mega-rounds will continue as investments that have been placed over the last couple of years will enjoy positive returns. If the public markets don’t hold up to valuation expectations from late-stage investors there will be a question about much late-stage private capital these large private companies can continue to access. If the market continues to provide late-stage investors with positive returns, I think we’ll see that money continue to flow into these businesses.
PitchBook: Given the potential for a cool down in the market, how might a new startup adjust their pitch to VCs?
Bob Blee: We all know that some of the best companies have started in dips and we could see that again in this cycle. Ultimately, I wouldn’t over-calibrate to adjust to valuations and macro factors. Great companies get built in and out of good cycles.
Buddy Arnheim: Right now, there’s more of an emphasis on capital efficiency and maybe some adjustment to expected growth rates. We’re already starting to see some of mid and late-stage businesses that we advise becoming more cautious about how much capital they need to continue to expand their business.
PitchBook: What factors are you watching that could impact the venture ecosystem in 2019?
Bob Blee: We continue to be bullish in general on the venture ecosystem, given all the tailwinds we’ve been talking about. But, there are four major factors that we are watching.
The first is public valuations, which obviously took a dip in late 2018—and dips like that can translate pretty quickly to the private markets, as it did in early 2016. Right now, companies are more flushed with cash, which could dampen the impact of dips in valuations or deal volume.
Secondly, given a longer period of lower valuations, we might see the denominator effect come into play. If LPs suddenly have a large proportion of their portfolio of equities at a lower value, the relative amount of alternative asset class holdings would be higher.
Third, changes in interest rates could have an impact. With so many non-traditional venture investors coming into the ecosystem (including sovereign funds, private family offices, hedge funds, corporates, etc.) with uncommitted funds, it would make sense for things to level out and shift to a higher yield, which would have an impact.
Finally, SoftBank had such a big impact when they came in with the Vision Fund. The existence and timing of a second similar fund would have a big impact.
Miss the webinar? Watch the recording.