A banner year for exits in private tech growth asset class

Finish Line
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IPOs may steal all of the headlines, but when it comes to the liquidity of venture-backed tech companies, M&A exits remains the bread and butter of the industry.

In 2016, that was absolutely true.

While the number of VC-backed tech IPOs went down, year-end PitchBook data shows that corporations paid more than $60 billion in 2016 to acquire U.S.-based tech companies. Impressively, the mean price of the acquired companies rose more than 40 percent, and the median consideration doubled, according to PitchBook.

Thus, corporations paid the highest prices for technology companies ever. If corporate buyers – also known as the smart money – are spending this kind of cash on VC-backed tech companies, that should throw yet more cold water on the criticism that the private tech growth asset class is universally overvalued.

In fact, the story may get even better, once all of the M&A deals are closed and reported. Right now, 2016 stands as the second best year for M&A for VC-backed, U.S.-based companies. Only 2014 was slightly higher, with $69 billion in total volume and a median price 46 percent below 2016 level. That high watermark was driven by an outlier transaction: Facebook’s $19 billion acquisition of WhatsApp.

So who were the big winners in 2016? By far, it was the information technology sector. Deals in that space totaled $29 billion, up from $17 billion in 2015. By contrast, VC-backed healthcare M&A fell to $21 billion from $27 billion.

What happened?

Last year started out looking as if it would be a mediocre year at best. Following the correction in August 2015, the venture-backed space appeared to be bumping along. That certainly was the case for VC-backed tech IPOs for all of 2016, which had one of the worst years in recent memory.

But then blue-chip companies decided it was a good time to go shopping. Among other notable deals, Walmart bought Jet.com for $3 billion, and GE Digital purchased ServiceMax.

Both were undeterred by what some felt were overheated valuations. In fact, companies were willing to pay a premium to buy companies that would enable them to innovate or offer new products.

Sven Weber, managing director, SharesPost. Photo courtesy of the organization.

Recent Bloomberg data shows that the number of tech companies sold to non-tech corporations for the first time in 16 years exceeded those acquired by tech companies. That’s highly positive indicator. Corporations of all stripes are willing to use their significant cash positions to keep up with innovation.

For VCs, the surge in M&A exits couldn’t have come at a better time. These liquidity events allowed them to plow cash back into their funds and make much-needed distributions to investors. Because 2016 was a light year for IPOs, and next year may prove to be the same according to our recent investor survey , M&A exits helped save the day.

The M&A-driven liquidity is a very healthy sign for the private tech growth asset class. M&A exits, which always far outnumber IPOs by a 20:1 ratio, are continuing to power the entire innovation ecosystem, particularly here in the San Francisco Bay Area.

Going into 2017, we have every reason to believe the year will be another strong one. If policy changes are made that encourage the repatriation of overseas assets back to the United States, there may be even more cash to fuel M&A exits.

Whatever happens, one thing we know for sure: The private tech growth asset class is here to stay. It didn’t implode as many predicted. It simply emerged from its funk and is more vibrant that ever. The asset class has emerged as a driver of innovation across all sectors of the economy. In 2016, it was such a powerful force that it even captured the attention of non-tech companies.

Sven Weber is a managing director of SharesPost’s SEC-registered investment advisor, SP Investments Management. 

Photo of business people at finish line courtesy of ©iStock/viafilms

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