Snap Inc., the parent company of digital communications app Snapchat, has recently been listed on the NYSE with a market cap of around $24bn, making it the largest tech IPO since Alibaba two years prior. Evidently, the scale of the IPO has generated a lot of attention from investors, which have otherwise endured a scarcity of public offerings in recent years. According to Preqin data on Private Equity Online, the number of venture capital-backed IPOs has fallen 55% since 2014, and correspondingly the prominence of the public market as an exit route has fallen from representing nearly a fifth of venture capital exits in 2014 to just 10% in 2016.
Despite the recent IPO drought, the venture capital industry has seen steady growth. According to the 2017 Preqin Global Private Equity & Venture Capital Report, 2016 marked the third consecutive year in which fundraising topped $50bn. The average size of venture capital funds reached a record high for funds closed in 2016, up 15% from the previous year. Investor appetite for the industry is apparent: 28% of institutional investors surveyed cited venture capital as providing the best opportunities for investment, second only to small to mid-market buyout funds. Additionally, 18% of investors expect to commit more capital to venture capital in 2017, and 30% of investors plan to increase their allocation over the longer term.
Despite strong fundraising, the majority of investors surveyed cited the current exit environment as a key issue in the industry. The overall number of venture capital exits decreased by 15% in 2016, while the aggregate value of exits fell 21%. For the second consecutive year, the exit environment has continued to slow, and is now at its lowest level since 2013. Managers are increasingly under pressure to convince LPs of prospective exit opportunities.
Nevertheless, the company’s ambition to IPO in a lacklustre market reveals its confidence and outlook on the industry. It is possible that the scarcity of public offerings was due to uncertainty in the market, with political events such as Brexit and the US presidential election dissuading companies from going public. The Snap Inc. IPO is valuable to the venture capital industry as IPO activity is generally cyclical, resulting in “hot issue” markets. One large and successful IPO, such as Snap Inc., could start a movement of offerings in the industry and influence exit environment activity in the coming months.
Its first few weeks on the NYSE have been volatile for the company, but the stock has yet to dip below its offering price of $17 a share. The success of the IPO has been a topic of debate for many investors, although most can agree that the preliminary venture capital firms involved in the deal are some of the IPO’s biggest winners. Both Lightspeed Venture Partners and Benchmark Capital are expected to profit substantially from the IPO as both were early investors in the company. Lightspeed Venture Partners invested $0.49mn seed capital in the firm, while Benchmark Capital invested $13.5mn Series A capital.
Only time will tell if Snap Inc.’s IPO is the start of a new, hot-issue market, but it may have a more immediate effect on investor outlook. The high returns seen by the venture capital firms involved in the deal may help to ease investor concerns regarding exit opportunities. The LPs invested in those firms are likely to receive large payouts, something investors have been yearning for the past few years. Perhaps the IPO’s biggest achievement will be its overall effect on investor sentiment surrounding venture capital performance.