An Imperfect Glance At Tech’s Notable Exits In 2017

This will be a brief post looking back at some of the notable tech exits of 2017. Before we begin, there are many disclaimers that must be made… [note: if we missed a “notable” exit, please let me know & I’ll update the sheet…]

First, this is not complete and perfectly accurate data; this data is difficult to obtain, so we did our best with publicly available sources to find the most notable exits (read: not every single exit). Second, this data will not reflect a potentially decent number of acquisitions that are below $100M in sale price, as in many of those cases, the acquiring company (if public itself) isn’t required to publicly disclose such transactions. Third, without seeing the actual cap tables at time of sale, it’s difficult to know the specific ownership holdings for investors. Fourth, for the year’s tech IPOs, we looked at the work published by CNBC’s Ari Levy; as such, it is difficult to know what the stock price will be for companies that are still in a lock-up period. Fifth, the cooler exit environment (which has been going on for the past three years) has likely increased the volume of dollars going to purchasing and selling secondaries, and, well, that data is nearly impossible to get — except there’s Uber, which we are starting to get details on. Softbank’s recent investment in Uber will likely take care of early shareholders and, given the size, have the liquidity feel of a major IPO, except here there is no holding period. So, assume it’s happening, and happening at least at a 30%+ discount to the most recent valuation. Sixth, there may be some sampling error as most of the M&A list was crowdsourced. Seventh, reported sale prices for M&A may not be entirely accurate, as the tech press often has to triangulate what the final price was, and there are often earnouts and other hidden clauses that obscure the real exit value number. Eighth, some M&A involves stock from the acquirer, which could then be held and appreciate for the original shareholders. Still reading? And, finally, ninth: exits like these we see here in 2017 are themselves outlier events by definition. They don’t happen often. Therefore, one should be extra cautious in drawing conclusions from them. I will try to apply that level of caution below, and if you have a substantial correction or edit to suggest, please do let me know and I’ll do my best to update the spreadsheet.

Ok, so let’s get to it. To begin, here is a very rough worksheet (now in Google Sheets) we assembled to capture and organize this year’s exit data. You will see two tabs — one for M&A, the other for IPOs. Here are my quick takeaways from this:

M&A (16 notable/reported)
-Liquidity generated this year via M&A could see more dollars flow to outside the Bay Area than within the Bay Area, based on the headquarters listed for the companies which were acquired this year.
-Most of the M&A dollars are spent within the retail sector and on technology infrastructure, with glimmers of heavy industry participating, too.
-If we generously assume the largest private investment firms in each deal owned 15% of its portfolio company at the time of the sale, the total dollars generated per deal would often not be enough to “return the fund” (RTF).

Tech IPOs (14)
-Most tech IPOs this year were in the consumer/retail space, as well as in technology infrastructure and services, which is somewhat similar to the distribution for M&A this year.
-If we put Snap aside (as it’s the real outlier), we see roughly the same amount of dollars going into overall capital raises from founding to IPO (including the IPO itself) both outside and within the Bay Area.

The Ugly
-The majority of exits bring liquidity gains to the U.S. coasts — California and New York City, with a bit of Boston and others scattered across M&A.
-Looking out a few years ahead, most of the IPO pipeline is concentrated in California and China.

The Bad
-For another year, the total number of liquidity events seems and feels low given the amount of money flowing into tech startups.
-Most singular liquidity events listed in the exit table wouldn’t generate enough cash for the largest private investor to return their fund, assuming in each case the largest investor, at exit, owned a generous 15% ownership stake. In practice, most don’t hold as much as 15% at exit, so the math is telling us many funds we know by name may need 2-3 mega-outcomes to get a multiple on their fund. It is unclear how this all shakes out yet, and as you’ll see below, the big money is waiting until 2019-2020 to take stock of these strategies.
-The entire startup tech ecosystem will need to exercise more patience and wait, wait, wait for….

The Good
-Now, for the good news for the tech/startup ecosystem. A surging stock market (if it sticks) paired with massive corporate tax cuts could encourage public companies to acquire more aggressively while their own stock is surging with the tide. (Note, this should not be interpreted as an endorsement of a particular public policy.)
-It appears that there is a good chance future tech/startup liquidity events will spread out beyond California and New York as we look into the future.
-The pipeline for beyond 2018 for tech IPOs looks incredibly stacked (especially so in 2019), with big-time consumer names in high demand, such as: Uber, Slack, Airbnb, Stripe, Wish, WeWork, Lyft, Houzz, and many other lesser-known names.
-The wrinkle, however, is that most of this particular, high-demand pipeline consists of startups that are headquartered in California and China. Should those values hold, the returns will be concentrated here in the Bay Area and across the Pacific, minting more and more millionaires and continuing to both act as the fertilizer for funding the next wave of companies but also will place pressure on local price inflation.