A record year in 2018, driven by high value exits in Europe and Asia

On a global basis, 2018 has been a record year for material exits of VC-backed companies, with exits totaling $257bn in value. This is an increase of over 100% on the value of exits in 2017 and over 50% higher than the prior peak in 2014. The number of exits has set a new record of 150, 10 higher than the previous peak in 2014, highlighting positive momentum for the realisation of value in VC-backed companies. The average value of exits has also significantly increased, driven by European- and Asian-founded companies. The value of exits of US-founded businesses has also been at record levels, albeit by a smaller margin to the outperformance in Europe and the US. 

Note, we define "material exits" as being those valued at $250m or more and the value is based on acquisition price for M&A exits and market cap on IPO pricing for IPOs. Our regional analysis of exits is based on the location of where the company was founded. For example, Spotify is classified as a European exit; however, its IPO was completed on a US stock exchange. We use the exit multiple of funds invested to provide a proxy for investor returns; however, note this does not equate to actual returns, as it does not take into account timing and valuations of investments and founder's equity.

Exits from IPO account for most of the increased value of exits in 2018. The value of M&A exits ended the year at $63bn, broadly in line with other years. By contrast, the value of IPOs ended over $190bn, well above prior peaks, driven by a higher number of IPOs and significantly higher average value than prior years.

European VC-backed companies have made high profile public market debuts in 2018 ...

There have been a number of IPOs of high profile Asian (all Chinese) and European businesses that have come to market at very high market caps, including Xiaomi ($44bn market cap at IPO), Spotify ($30bn market cap at IPO), Pinduoduo ($19bn market cap at IPO) and Adyen ($7bn market cap at IPO). These have been the key driver of the average exit value at IPO, increasing from $1.5bn in 2017 to $2.2bn in 2018.

Spotify and Adyen have been the highest profile exits in Europe and both of them have delivered very strong returns to venture investors, with their exit values representing 14x and 28x the capital invested in the businesses, respectively.

Spotify represents the third biggest global venture-backed exit ever after Facebook ($81bn market cap at IPO in 2012) and Xiaomi. The business was founded in 2006 in Sweden and was the pioneer in online music streaming. Its Series A round was led by Northzone (Nordic-focused VC) and it then attracted investment from US-based investors, including Wellington, Founders Fund (Peter Thiel), Kleiner Perkins and Accel. In total, it raised $2.1bn as a private company prior to its IPO. The stock initially performed well following the IPO, but has since reverted back towards its pricing on IPO.

Adyen represents the biggest exit globally in the FinTech sector to date, achieving a $7.4bn market cap at IPO on Euronext, which has been followed with a strong after-market performance (+160% since IPO). The business was founded in 2006 in Holland as a next-generation payment processing company that allows businesses to accept e-commerce, mobile, and point-of-sale payments. It competes with other VC-backed next-generation companies, such as Stripe, Klarna, Square (NYSE: SQ, mkt cap $23bn) and Braintree (acquired by PayPal in 2013 for $800m) and is differentiated in its strong profitability (44% operating margin). Index Ventures led smaller venture rounds in 2011 & 2014, before General Atlantic led a $250m growth round in 2014. The returns to investors have been very strong, with the IPO value at 28x capital invested and the after-market performance enhancing this further.

There have also been four additional European exits completed in 2018 valued above $1bn, two of which were through IPO and two of which were through M&A. Two of these were also in the FinTech sector, iZettle (small business payments) and Funding Circle (peer-to-peer business lending platform). Investor returns were solid in the case of iZettle, which achieved an exit value of 6x funds invested; however, a little muted for Funding Circle at 3.4x funds invested (valuation was apparently constrained by concerns over the UK credit cycle).

The other two deals were in the Consumer and Healthcare sectors. Farfetch, the luxury fashion retail platform, completed an IPO valuing it at $5bn, delivering reasonable returns to investors. Prexton Therapeutics, a biotech company developing brain medications, was sold to Lundbeck for $1.1bn, with investors gaining very strong returns from an exit value of 26x compared to the modest $43m invested into the business.

There have been nine exits worth over $1bn of Asian-founded companies and all of these have been through IPO, either through an ADR on Nasdaq/NYSE or a listing in Hong Kong.

The highest profile was Xiaomi, the Chinese producer of smartphones and consumer electronics. After an aborted attempt at an IPO in 2016, it completed an IPO in Jul-2018 on Hong Kong, valuing at $44bn, which was well below the $100bn valuation initially mooted earlier in the year. The business was founded in 2010 and received around $1.6bn of equity financing and $2bn of debt financing prior to its IPO. It received its initial VC funding from Chinese VCs, such as IDG Capital and Qiming, and then attracted capital from a broad range of international investors, including Qualcomm, Temasek, DST and Accel.

...although it has performed poorly in the after market

Xiaomi built substantial scale in low cost, high functionality smartphones, which it sells at low gross margins with the aim of locking users into its high margin advertising and services ecosystem. The business has had a volatile growth track-record, growing rapidly from inception to revenue of $10bn in 2015, experiencing flat revenue in 2016, followed by a resumption in growth to $17bn in 2017 and $28bn expected in 2018. Around 90% of this revenue is for hardware, which is sold at very low gross margins of around 9%. The remaining 10% of revenue is from advertising and services for the 190m users of Xiaomi devices, for which gross margins are around 60%.

The IPO raised $3.4bn in new money and provided liquidity of $1.5bn to existing investors (effectively giving them their money back). On paper, the returns looked very strong, with the IPO valuing the business at 22x the funds invested; however, the stock has performed poorly post IPO, falling by 42%. It is now valued at 1.35x FY18E revenue and P/E of 19.7x FY18E, which in some ways is optically cheap relative to its growth, but investors are clearly mindful that mature consumer electronics giants like LG trade at just 0.3x revenue and 7x P/E. A six-month lock-in for the pre-IPO investors (which still own around 45% of the company) expired in early Jan-2019 and so the ultimate returns for the venture investors remains an open question.

Pinduoduo has performed better despite some questions around its route to profitability

The other big IPO of a Chinese company was Pinduoduo, the social e-commerce store, which has a similar model to Groupon but with a social element, in that users can invite their contacts to form a shopping team to get a lower price for their purchase. The business was founded in 2015 and raised $110m in early 2016 from Chinese VCs and Tencent. It also completed a $3bn pre-IPO round in Apr-2018. The business has scaled incredibly quickly and its revenue was $278m in 2017 and is expected to be $1.6bn in 2018, with gross margins of c.80%. However, it's sales & marketing expense (including something referred to as coupon expenses) is expected to be higher than the revenue at $1.9bn and an operating loss of $983m is expected.

The IPO valued it at $19bn, which represented a stunning return for the initial VC investors at c.200x the capital invested (excl. the pre-IPO round). The after-market performance has been volatile, but it is now +53% above its IPO price. Revenue is forecast to increase over 100% in 2019 to $3.5bn and the sales & marketing expense is forecast to drop to (only) 73% of revenue, which would drive it towards break-even. It will be interesting to see whether these forecasts are realised.

Asia and Europe top value creation for investors

In conclusion, while both the European and Asian VC markets have remained behind the US for number of deals and exit value, the two regions have provided the most value creation to early stage investors in 2018.

Asian headquartered companies accounted for 37% of the total value created in 2018, which is ahead of the prior peak back in 2014, when Asia was 33% of the overall value creation. European companies were also at their highest levels, having generated 25% of the overall value creation to investors in 2018, with the second highest being 18% in 2016.

We believe that the healthy ecosystem of private companies in Europe is now providing a pathway to value creation that will in the future catch up to that of Asia and the US.

European VC-backed exits

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Author and Lead Venture Analyst

Nick James, Director, Tech/Venture Research