Exit Optimism is Here to Stay
Key trends in technology exit activity point toward continued momentum for founders and investors seeking to build toward future exits
Looking back at 2020, most of the headline news focused on large technology companies — the most notable beneficiaries of a pull forward of future digital demand.
Smaller, private technology companies were poised for continued growth heading into 2020. Investment activity showed some moderation in Q2'2020 as investors paused to examine the cyclical versus structural shifts that could impact the future.
Overall, venture capital and growth equity investment activity were resilient in 2020 and exit trends showed a healthy mix of stable values and demand from buyers.
First, let’s review initial and follow-on investment activity which represents today’s foundation for tomorrow’s exits.
Investment activity in technology and software businesses remained resilient in 2020 after exhibiting a steady rise based on overall deal value during the past decade. By the end of the year, 2020 represented an all-time high based on deal value.
Quarterly deal activity showed declines from 2019 levels, including a year-over-year decline of 14% and 15% in Q2'2020 for software growth equity and technology venture capital as the uncertainty of the COVID-19 spread disrupted activity.
Despite this decline in Q2'2020 deal count, deal value for the quarter was higher from the prior quarter and the prior year.
Shifting toward the exit environment in 2020, the exit paths for venture and growth backed companies continued to present multiple attractive avenues for liquidity.
Venture-backed companies have historically achieved exits through strategic acquisitions, IPOs or buyouts from private equity investors.
Over the past 15 years, the portion of buyout exits rose from 9% to 18% of total exit counts. The strategic M&A portion of exits declined from 84% to 75% was driven by the notable rise in private equity not a pullback from strategics as M&A was stable or rising during the period.
IPOs have historically been the exit path for the largest exit sizes for venture-backed companies as seen in the 2006–2010 period where the average IPO exit size of $256 million was 5.9x the average size of non-IPO exits.
The IPO exit size of venture-backed companies has only grown larger, much larger, over time.
During 2016–2020 IPO exits, the average value grew to $1.27 billion which was 19.4x the average size of non-IPO exits. For 2020, that IPO-to-non-IPO exit size ratio reached an astounding 26.4x.
M&A exits declined by 23% but value was higher
2020 venture-backed company acquisition exits declined based on completed deals, but the aggregate deal value increased from 2019 levels.
Strategic acquisition activity was down 35% in Q2'2020 and Q3'2020 from 2019 levels as corporate M&A took a greater pause driven by the COVID-19 uncertainty. The deal volume pause seemed temporary as Q4'2020 exit volume was strong.
Private equity exits are trending upward
The portion of IT & B2B deals as a percentage of all private equity deals has shown a steady increase, rising to 52% of deals in 2020.
Growing interest from larger private equity buyers will continue to support future exits for smaller technology businesses.
Technology-focused private equity funds are larger leading to more dry powder to deploy
Technology-focused private equity funds have raised substantial dry powder which should provide ongoing demand for smaller technology companies seeking future liquidity.
The 2019–2020 average technology-focused private equity fund size raised of $1.4 billion is 2.8x the average fund size raised during the 2010–2018 period. The $152.7 billion raised in 2019–2020 was over two-thirds of all the capital raised for the prior 9 years from 2010–2018 ($223.6 billion).
Although the total number of funds raised dipped to a low not seen since 2013, the average fund size raised reached a record high for a second straight year.
Valuation premiums from large tech buyouts firms
The valuations of venture-backed companies have continued to rise across both strategic acquisitions and private equity buyout exits. Since the valuation bottom in 2009, valuations increased at CAGRs of 14% and 18% through 2020 for M&A and buyout exits, respectively.
Furthermore, buyout exits exhibited a modest historical 17% premium value at exit compared to strategic acquisitions between 2006–2016. This exit premium for buyouts vs acquisitions has expanded significantly during 2017–2020 where the average premium was an astounding 100%.
The potential wildcard upside for exits — IPOs and SPACs
The overall exit markets could be further enhanced if the “window” for public listings via traditional IPOs or SPACs remains “open”.
Collectively, venture-backed company IPOs and new SPACs totaled nearly $300 billion raised in 2020. New SPAC issuance was a leading news headline in 2020 given the all-time issuance of $75 billion raised across 250 companies — reaching 25% of total issuance.
There is always uncertainty on how long the window to public markets stays open and the longevity of the SPAC momentum is even more uncertain.
The SPAC frenzy continued in January 2021 with roughly $25B raised, around a third of 2020’s record setting total.
Considering these exit paths as options for specific situations is more prudent. Perhaps they offer upside potential long term as a complement to traditional M&A or buyout exits.
To sum it all up,
Small technology companies should remain optimistic as they plan and position to attract larger strategic partners or larger investors in the future.
As we pause to reflect on 2020 investment activity, the outlook for 2021 & beyond should be supported by exit trends that will continue to present attractive paths for software and technology businesses.
Source: The charts are based on data available through December 31, 2020 provided by the Q4 2020 Pitchbook-NVCA Venture Monitor and the Pitchbook 2020 Annual US PE Breakdown
