State of Tech Investment - 2017 review
State of Tech Investment - 2017 review
Reflections on deals, M&A and expectations for the future
Daniele Pe - Associate Partner
Francesco Tollini - Business Analyst
After the 2016 slowdown, the Tech market returned with vengeance in 2017 as investors focused their attention on maturing startups and deployed record levels of capital across technologies.
While deal activity continued to slow, the shift from smaller investments towards larger deals drove VC funding to an all-time high of $155 billion, having more than doubled since 2013.
2017 was not just a year of bigger deals. Mega-rounds defined the year with five deals alone accounting for 11% of funding. This is now referred to as the “SoftBank effect”, as the Japanese conglomerate’s $93 billion Vision Fund deployed more than $18 billion in 16 deals including the year’s two biggest, Didi and wework.
These mega-rounds in general were fueled by Corporate Venture Capital (CVC) funds, underlying corporates growing appetite for outsourced innovation. This thirst for deals led to a spike in the number of new corporate investing arms. Companies like Bose and Honeywell are just two of the 186 companies that jumped on the disruptive Tech bandwagon, a year-on-year increase of 66%.
Looking at investments distribution, US startups remain the overwhelmingly favored home for investment as more than 50% of VC funding hit US shores. However, China’s growth is seemingly endless and now has close to 30% of the market share.
Beyond investment in the usual Tech verticals, like e-commerce, ride sharing and AdTech, 2017 saw a huge increase in frontier Tech investments. Frontier Tech funding reached $28 billion, a 76% increase over previous year. Artificial Intelligence, thanks to its widespread applicability across industries, drove most investment with $12 billion poured into the industry, almost double that of 2016. IoT followed with $10.3 billion, an increase of 31%. Other frontier Tech like Blockchain, while growing at high double digits CAGR, remain a small share of VC investment today but not for long.
Overall investment growth drove a small but tangible increase in valuation, between 3-7%, suggesting confidence in the industry. This can likely be attributed to sizable revenue growth and stronger sentiment in the potential profitability of the Tech industry. For example, Uber’s net loss fell by 25% in the final quarter of 2017 while the profits of Tech Giants like Amazon and Alphabet surged significantly to 171% and 30% respectively.
Exhibit 1: CVCs are becoming increasingly relevant in the investment scene
Industry confidence is questionable when examining exits. Last year saw the lowest number of exits in more than five years, driven by a significant drop in M&A activity. One respite was the number of IPOs, which was the healthiest in three years.
The year also saw a slowdown in VC fundraisings. However, this may be an impact of the enormous amount of capital raised in the previous years and the capital overhang created by the lower level of investment in 2016.
Overall, the industry seems confident that VC funding will remain strong this year as corporate venture capitalists continue exploring startups to drive growth and cash availability remains strong. In fact, the recent US tax reform, which encourages the repatriation of corporate cash, is expected to drive an even greater level of CVC investments. This will also increase the number of M&As, which together with a steady number of IPOs could drive exits in 2018 back to comfortable levels.
This year will also likely show a rebound in early-stage investment rounds with Asia and Europe playing a greater role. Meanwhile, frontier technologies like AR/VR and Blockchain could shake their gimmick label and become mainstream.
Telcos are under unprecedented financial pressure and need to identify emerging business models as a priority as AI/ML, IoT and blockchain introduce yet more disruption. However, CVCs are betting heavily in this area, so they’ll need to adopt a specific model, whether its directly managing a fund or entrusting a third party. Telcos can no longer shy away from such investments and risk.
This is a synopsis of the full report which can be found below.
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