Publish Date: 04 September 2019

Author: Mark Addison

m.addison@xrocket.io

Will ‘Unicorn’ Funding Consolidation Mean an M&A Exit for Your

Company?

Abstract: Unicorn sightings aren’t so rare anymore. There are now 393 private companies with valuations
1
>$1 Billion, according to CB Insights. Uber and The We Company (aka We Work) have raised $24 Billion
and $14 Billion in funding, respectively. Those are B’s, as in Billions.

But if you look at funding patterns and exit trends, while early-stage investing remains robust, the volume
of late-stage funding growth has plummeted as money consolidates behind a select few ‘supergiant’
rounds. IPOs continue to garner news headlines as marketing-heavy brands get buzz, but M&A deals is
where the volume of the action is.

What these trends mean is that it’s more and more likely your company will either grow or exit via M&A
transactions. So you should be thinking about how to optimize for an M&A outcome.

This article is published also at https://www.linkedin.com/pulse/unicorn-funding-consolidation-mean-ma-exit-

your-mark-addison-m-b-a-/

TL;DR

- Very early-stage funding is up 17.7% but late-stage funding is up 2.1% and consolidating
behind fewer and fewer companies.

- So-called ‘supergiant’ funding rounds (>$100 million) have increased in the past decade
from rarely (9% of all fundings in 2008) to the majority (67% of fundings in Q4 of 2018).

1
https://www.cbinsights.com/research/unicorn-startup-market-map/
- The 15 companies on the IPO calendar for 2019 are ‘unicorns’ that have raised the bar in
terms of marketing spend and investor-fueled land-grabs.

- These ‘winner-take-all’ funding patterns mean that the chosen companies have war chests
of cash on hand for strategic (and defensive) M&A to consolidate competition.

- In turn, M&A deal sizes are getting larger (10 companies in Q1’19 garnered valuations
>$200 million; 4 achieved >$3 Billion), and has become a very attractive way to exit.

- Conclusion: all trends are aligning toward an M&A exit being more likely in your future.
Which means that you should be thinking about how to optimize your company’s M&A
positioning and valuation.

Below is a full analysis and research citations to support the argument above. In my next post,
I’ll dive into how M&A valuations are negotiated, and the difference between ‘financial’ value
and ‘strategic’ value to a buyer.

Analysis: What’s going on here?

After pouring over SEC filings and Crunchbase data one weekend, I could see some distinct
patterns emerging between 2018 and 2019 funding.2 Let’s first look at some data for deal
#volume and funding $amounts comparing y-o-y growth from Q1’18 to Q1’19:

STAGE DEAL # % GROWTH FUNDING $ % GROWTH

Seed & Angel 5,196 7.2% $3.46 Billion 17.7%

Early-Stage (Series A + B) 2,315 5.2% $26.99 Billion 10.9%

Late-Stage (Series C, D, E...) 586 6.7% $44.5 Billion 2.1%

Funding Consolidates into the Few:

There is a steep drop-off in deal #volume as rounds progress, but this is normal investment
behavior as companies that fail to gain traction drop out. Moreover, the funding dollar $volume
increases as funding round progress, which is also normal behavior as the remaining
companies step hard on the gas pedal to scale their operations.

But what the table doesn’t show is the concentration of those late-stage dollars: investments are
flowing disproportionately into “supergiant” rounds of >$100 million. Ten years ago, only 9% of
all funding rounds fell into the supergiant category, but in 2018, and especially Q4’18, the
majority (67%) of funding went into supergiant rounds---the highest concentration ever on
record.3

2
https://news.crunchbase.com/news/venture-capital-in-q1-2019-the-world-pulls-back-from-record-highs/
3
https://news.crunchbase.com/news/global-vc-market-sees-highest-ever-concentration-of-supergiant-
What’s going on is that a smaller number of companies are receiving a greater share of
available funding dollars (more on this below).

A High (Marketing) Bar for IPO:

Looking at more data, SEC filings so far this year show that 15 U.S. companies4 are on the
calendar to IPO in 2019, and 9 have already gone out. Most of these companies became
household brand names already long ago--and it appears that it’s their marketing dominance,
not their profitability, that is driving investor activity.

COMPANY TICKER INDEX

Airbnb - -

Beyond Meat BYND Nasdaq

Chewy CHEW NYSE

Crowdstrike CRWD Nasdaq

Fiverr FVRR NYSE

Lyft LYFT Nasdaq

Peloton PTON Nasdaq

Pinterest PINS NYSE

Postmates - -

Robinhood - -

The RealReal - -

Slack WORK NYSE

The We Company (We Work) WE -

Uber UBER NYSE

Zoom ZM Nasdaq

Where are the highly-profitable-but-boring infrastructure companies that are simply tapping
affordable public markets for growth capital? Rightly or wrongly, these are all early-investor
liquidity plays, not true corporate capitalizations.

dollar-volume-in-q4-2018/
4
https://www.nerdwallet.com/blog/investing/upcoming-ipos-to-watch-in-2019/
Winners-Take-All:
The companies on the 2019 list above often had unicorn valuations and $ multi-billion funding
rounds long before their IPOs. The trend among late-stage investors now is now to consolidate
their bets behind a few ‘chosen’ winners to almost guarantee winner-take-all status by
hoovering up all available cash. It’s the investment equivalent of sucking the oxygen out of the
room.

In some companies, that late-stage cash is burned at astronomical rates to fund global
expansions and/or vertical market land-grabs. In other companies, the money sits in a war chest
used for strategic (or defensive) M&A to consolidate competition before they even gain traction.

M&A Deals:
If your company has not attracted supergiant funding to fuel global marketing campaigns and
international brand notoriety, all is not lost. Exiting via M&A (acquisition, from your perspective)
can be a sweet deal, because M&A deal sizes5 can be quite hefty also. Uber spent $3.1 Billion
to acquire Careem’s ride-hailing business in the Middle East, for example. Dynamic Yield sold
it’s AI software to McDonalds for $300 Million; Gimlet Media and Anchor sold their podcasting
operations to Spotify for $340 Million combined. Not bad exits for any of those companies!

In the list of the top-12 largest acquisitions among US-based, VC-backed startups in just Q1’19
alone, there is not a single deal smaller than $140 million:

TARGET DEAL $ SIZE ACQUIRING CO. SECTOR

Loxo Oncology $8,000,000,000 Eli Lilly Pharma

Spark Therapeutics $4,800,000,000 Roche Biotech

Auris Health $3,400,000,000 Johnson & Johnson Biotech

Careem $3,100,000,000 Uber Ride-hailing tech

Webroot $618,500,000 Carbonite Security software

Dynamic Yield $300,000,000 McDonalds AI software

Zoosk $255,000,000 Spark Networks SE Dating app

HelloSign $230,000,000 Dropbox E-Signature tech

Gimlet Media $200,000,000 Spotify Podcast

CloudEndure $200,000,000 Amazon Enterprise software

AgileCraft $166,000,000 Atlassian IT software

5
https://news.crunchbase.com/news/venture-capital-in-q1-2019-the-world-pulls-back-from-record-highs/
Anchor $140,000,000 Spotify Podcast

Why should you care (right now)?

Most company founders aren’t thinking about their exits when they start their companies. You
have a clever new technology solving an under-served pain point affecting a large potential
market. All you need to do is scale, right? But the moment you take on investors to achieve that
scale, you are setting yourself up for one of three end-games:

- IPO exit
- M&A (acquisition) exit
- Lifestyle business (a.k.a. ‘Zombie’ in investor-speak)

Investors seek returns, so we can presume that no investor really wants to invest in a lifestyle
business (unless, of course, it’s their lifestyle), so that leaves IPO or M&A. And the data shows
not only that the IPO bar is high, but that the late-stage cash needed to get there is
consolidating.

All of which means that you should be thinking about what your M&A opportunities are**, and
how to optimize your M&A positioning and valuation.

** hint: if you are part of any sort of supply chain, look to the companies immediately upstream
and downstream from you

Sources:
1. https://www.cbinsights.com/research/unicorn-startup-market-map/
2. https://news.crunchbase.com/news/venture-capital-in-q1-2019-the-world-pulls-back-from-record-highs/
3. https://news.crunchbase.com/news/global-vc-market-sees-highest-ever-concentration-of-supergiant-dollar-
volume-in-q4-2018/
4. https://www.nerdwallet.com/blog/investing/upcoming-ipos-to-watch-in-2019/
5. https://news.crunchbase.com/news/venture-capital-in-q1-2019-the-world-pulls-back-from-record-highs/

https://news.crunchbase.com/news/global-vc-market-sees-highest-ever-concentration-of-
supergiant-dollar-volume-in-q4-2018/
https://www.cbinsights.com/research/unicorn-startup-market-map/
https://www.nerdwallet.com/blog/investing/upcoming-ipos-to-watch-in-2019/
https://news.crunchbase.com/news/venture-capital-in-q1-2019-the-world-pulls-back-from-
record-highs/