Tech Startups by the Numbers
Investors and acquirers dig down for earlier-stage companies
Apple, Microsoft, Alphabet, and Amazon all started with an idea and few resources. Today this quartet has an average market capitalization of $2.2tn. Success stories like these and other tech startups fuel high levels of new company formation, capital investment, and the American entrepreneurial spirit.
Fact is that no other country approximates the number of startups in the U.S. at 63,703, which is followed by India (8,301) and the U.K. (5,377). For perspective, the US has almost three times more startups than the rest of the following nine countries in the world combined, according to Startupranking.com.
Big-tech status is both aspirational and a rare achievement. That’s why unicorns are labeled so; only one percent of startups that raised seed rounds were able to reach a valuation of $1bn, according to CBInsights. Though this might seem impressive, raising seed rounds is a challenge on its own.
A closer look at the startup landscape shows companies that reduce friction and encourage personalization and interactivity are capturing a large portion of the overall funding:
The current stampede in mobile payments, digital lending and investment management is propelling Fintech (7.1%) to Statista’s top industry for startups.
Major fintech players in the US attracted nearly $7.5bn in venture capital funding across 194 transactions in Q2 2021. This was up nearly 70% from the same period last year, according to S&P Global Market Intelligence. S&P found that pandemic-driven lockdowns accelerated digital finance adoption, and several fintech companies expedited their own expansion plans.
Life Sciences and Healthcare (6.8%) ranks second.
According to Global Market Insights, the biotech industry will swell to $775bn by 2024 – more than a 100% increase from 2015. Demand is growing from various end-user industries including food, agriculture, healthcare, while the COVID-19 pandemic has increased the demand for vaccines, diagnostic tests, drugs, among others.
Artificial Intelligence (5.0%) is next.
PwC’s research shows that 45% of total economic gains by 2030 will come from product enhancements, stimulating consumer demand. This is because AI will drive greater product variety, with increased personalization, attractiveness and affordability over time. The largest economic gains from AI will be in China (26% boost to GDP in 2030) and North America (14.5% boost), equivalent to a total of $10.7tn and accounting for almost 70% of the global economic impact.
Finally, ongoing advances in video chip technologies and interactivity are accelerating funding in Gaming (4.7%), Adtech (3.3%), and Edtech (2.8%).
Sunny Outlook for Early-Stage Startups
Confidence is the top currency for early-stage tech companies. Roughly three-quarters of startups in the U.S. and U.K. say they’re now upbeat about the next year, according to a report from Angel Investment Network (AIN).
This is striking because the AIN report also found that three in five startups reported seeing business growth negatively impacted by eighteen months of Covid. Of those who had been raising funds before the pandemic, nearly half saw investors pull out.
“The startups who have survived this strange period have in many ways been battle tested and hardened by the experience. By bootstrapping their businesses further than they’d originally planned, they have needed to focus on survival and sustainability, emerging stronger.”
When asked how they responded to the stalled investment, startups told AIN that they developed their pipeline of connections, held off launch plans, delayed marketing, and placed restraints on hiring, among other efforts. This has helped to attract venture funding.
It sure has. PitchBook reports that late-stage and traditional investor’s appetite for smaller companies are increasingly shifting to promising startups earlier in the venture lifecycle. The result: the median early-stage valuation has roughly doubled in the past three years, exceeding the $50m mark in Q3 – the entry level for publicly-traded microcap stocks.
Early-stage mega-deals are more common than ever, pushing average valuation step-up multiples to a record 5.1 times through the third quarter. Of all industries, early-stage biotech startups are commanding the highest proportion of deals compared with other stages through Q3, according to the Venture Monitor. The top quartile early-stage valuation in the sector topped $100m for the first time.
Meanwhile acquisitions of tech startups are scorching. Tech M&A activity and valuations are at record levels as cash-rich public companies with lofty stock prices continue to focus on strategic buys to enhance or extend core businesses.
Feeding the M&A Beasts
One constant throughout the pandemic was the steady flow of mergers and acquisitions across the tech sector. Global tech M&A deals last year totaled $634 billion, a 91.8% year-over-year increase, according to GlobalData. Among a late flurry of big deals was the $35 billion acquisition of Xilinx by Advanced Micro Devices and Salesforce's $27.7 billion acquisition of Slack.
451 Research reports that acquisition prices of tech firms have been averaging $219m this year – nearly 7x the 2007 level – while public companies are paying an average of 4.8x trailing sales in this year’s purchases, two full turns up from the previous era. Furthermore, public companies are on track to spend $445bn in acquisition consideration in 2021, more than double the spending in 2007 for a similar number of transactions.
In recent years, the most ravenous acquirers have been the giant tech companies, which swallowed up hundreds of mostly small firms.
Analyst Ben Evans points to the complexities of acquisitions and the issues about competition in tech today. He starts with references an FTC report published in September on Google, Apple, Facebook, Amazon and Microsoft, which as a group made 616 acquisitions of more than $1m from 2010 to 2019 – an average of 12 per company per year.
The vast majority of these companies were very small: 40% were bought for less than $10 million and 80% for less than $50 million, and most had less than ten people.
Next, Evans gives us something to consider as the volume keeps rising for regulatory scrutiny against big tech:
“If Amazon buys a company with six people for $4m, was this a competitive threat - the next Zappos or Shopify - or was that company pursuing a small opportunity, or hadn’t really worked (and half of VC-backed startups fail), and was bought for a small set of technology to tuck-in, and to hire the engineers (a so-called ‘acquihire’)?
“If you can plausibly claim you have a path to build a billion-dollar company.… Why would you take $5m or $15m, especially given you probably won’t see a penny of that yourself once the investors are paid down (and they’ll be taking a loss as well)? How much do you honestly want to work at Microsoft? The decision to take the money is a signal - it probably wasn’t that kind of company.
“Of course, if you start from the presumption that these must have been ‘killer acquisitions’ then you can explain this by saying that Amazon must have squashed a much bigger business and then bought the scrap for pennies. The word ‘must’ is a tell, though - this data provides no evidence for or against that…. if you do think ‘crush and buy’ is a systemic issue, your point of intervention should probably be the point it’s being crushed, not the point it’s too late.”
When asked about big tech’s place in the economy, Pew Research found that 56% of Americans think major technology companies should be regulated more than they are now, and 68% believe they have too much power and influence in the economy.
What’s surprising is that Pew also found there is less consensus among the public for breaking up major tech companies. It seems many people sense we’re too far down the road and that any deconstruction of big tech would create new problems.
Thus Evans’ point is well taken. He intimates that if big tech is pushing their weight around in a way that destroys the longer-term prospects of too many startups, then early intervention might be the only answer. But reality is that the speed and scale of evolving digital technologies is overwhelming (sometimes exponentially so), which makes any timely or effective actions unlikely to happen.
See you next week, and thank you for your support.
Josh
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