ICYMI: Oliver Wyman Report Finds Tech Sector Venture Investment Is Vibrant
A new report from Oliver Wyman, commissioned by Facebook, finds that, despite the hype, venture investment in the tech sector is vibrant and leading tech services’ success does not, in fact, lead to the mythical “kill-zone” in startup investment. Finding that total VC deal value has reached all-time highs and that acquisitions by large firms are a very small share of total transactions, Project DisCo has noted, “The findings dispel concerns that the sustained success of tech sector front-runners had put VCs off technology bets.”
A few key takeaways—
Deal value in the tech sector is at historically high levels:
“The global venture-investing market has seen broadly uninterrupted growth in total deal value since the dot-com crisis. The market is at record levels, with about $150 billion of venture investment in 2017, compared to about $55 billion prior to the dot-com crisis. Growth has come from both technology and other sectors, with technology experiencing marginally higher growth in recent years.” (“Assessing The Impact Of Big Tech On Venture Investment,” Oliver Wyman, 7/11/18)
Acquisitions by leading tech services are a small percentage of total acquisitions in the tech sector.
“The report also blows up the Economist’s notion that market leaders acquire all the most promising startups — a stark reminder of the adage that anecdote is not data. Relative to overall activity, tech acquisitions by prominent tech firms remain a small fraction of tech sector acquisition, having been at 1% or less since 2015. In fact, since 2011, acquisitions by leading tech services exceeded 2% of total tech M&A in only 2 years, and during those outlier years (Facebook’s 2014 purchase of WhatsApp and Google’s 2012 acquisition of Motorola), the leading firms’ share of tech M&A barely broke 10%.” (Matt Schruers, “Do Top Tech Firms Affect VC Funding?” Project DisCo, 7/11/18)
While the number of deals has declined, the value of deals has experienced strong growth — indicating a maturing sector.
These shifts are indicative of a global trend: “From a regional perspective, the data suggests a more uniform picture with all regions seeing growth in deal value and contraction in the overall number of deals since 2015. In the past two years, growth in deal value has slowed and the number of deals decline. The slow-down was led by Europe and the US, with the UK and the rest of the world seeing a slightly lower impact.” (“Assessing The Impact Of Big Tech On Venture Investment,” Oliver Wyman, 7/11/18)
Large-ticket investments and human capital costs drive the trend: “Growing total deal value and a declining overall number of deals imply an increase in the average deal size. The increase in average deal size has been driven by a growing number of larger-ticket investments. Despite declining technological costs, average deal values have grown as a result of soaring marketing budgets for startups’ go-to-market strategies. Additionally, human capital costs are rising as innovation hits new levels and demand for talent increases. Industry perspectives also suggest that as funds increase in size the fund prerogative becomes to deploy larger amounts of capital per round, thus increasing deal size.” (“Assessing The Impact Of Big Tech On Venture Investment,” Oliver Wyman, 7/11/18)
“As this chart from the report shows, instead of a larger number of smaller bets, investors are channeling more funding into a more focused number of ventures, to a degree that is 2.5 times higher than during the first tech boom. According to the report, startups received ‘about $150 billion of venture investment in 2017, compared to about $55 billion prior to the dot-com crisis.’ Looking across sub-sectors, the report found the greatest increase in hot areas like electric vehicles, blockchain, Bitcoin, e-sports, and robotics.” (Matt Schruers, “Do Top Tech Firms Affect VC Funding?” Project DisCo, 7/11/18)