For cash-intensive technology companies, access to capital is frequently required to sustain operations and quickly achieve scale. Venture capital firms invested over $30 billion in tech startups in the second quarter of 2019, according to data from Pitchbook, putting total investment on pace to eclipse $100 billion for the second straight year.
Throughout 2018 and so far this year, VC investment each quarter has exceeded $25 billion, largely fueled by 123 mega deals each worth more than $100 million. Investment rounds and valuations have been on the rise over the last few years, which is acceptable to the tech investment community due to the potential for significant upside value in the pre-IPO stage.
West coast investment rises
The West Coast remains the top region for venture capital investment, attracting 58% of dollars in the second quarter of 2019. Even though venture investment is now spread throughout urban tech hubs across the United States, Silicon Valley continues to command the largest portion of technology investment.
Aside from software, which accounts for approximately four of every 10 VC investments, health tech is projected to surpass last year and record a second straight year of investment in excess of $8 billion. The cost of health care approximates 20% of gross domestic product, which has doubled from three decades ago. Some of the increase is tied to baby boomers beginning to retire, as well as inefficiencies created by providers not leveraging technology to the fullest extent. Great opportunities exist within health care to leverage technology in new ways, specifically through artificial intelligence and machine learning.
Great opportunities exist within health care to leverage technology in new ways, specifically through artificial intelligence and machine learning.
Venture-backed IPOs recover after government shutdown
The federal government’s shutdown earlier this year hampered the timing of some technology unicorns trying to go public. Furloughed workers at the U.S. Securities and Exchange Commission led to holdups on M&A and initial public offerings that got stuck awaiting regulatory approvals. With the SEC back to work, the second quarter of 2019 saw exit values reach record levels, with IPOs representing over 80%, and the public offering of ride-share giant Uber accounting for half (see figure 1 below).
Venture-backed IPO window still open
So far this year, IPOs have returned more than 40%, significantly outperforming the New York Stock Exchange FANG stocks (see figure 2 below). In the software space, cybersecurity service Crowdstrike and videoconferencing platform Zoom have performed particularly well since their public market debuts (see figure 3 below).
Slack, the provider of direct messaging internet services is not listed below; it went public with a direct listing, not an IPO. More direct listings by technology companies with solid cash positions on their balance sheets and good brand recognition could be coming next year.
Continued access to capital will be important for the technology industry, especially as the economy enters later stages in the growth cycle. It’s very possible that in the slowing economy, coupled with a significant amount of dry powder among VC firms, SoftBank’s second tech megafund will be seeking the hottest technology companies. SoftBank’s first tech megafund had success with companies like Uber and Slack.
Several highly anticipated IPOs are on deck for the second half of this year (see figure 4 below ). Co-working space provider WeWork is reportedly looking to raise $3.5 billion; if successful, it would be the second-largest IPO of the year behind Uber. Next year’s offerings could also include large unicorn IPOs, such as online lodging broker Airbnb.