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Tech companies lately have been hoarding cash, at least in part to arm them for potential acquisitions, according to Bob Blee, head of corporate finance at Silicon Valley Bank. At the same time, venture capital firms have plenty of dry powder, which gives them plenty of weaponry for investments.
In a wide-ranging interview about the state of finance in the tech market, Blee said that companies were conserving cash partly in response to a range of economic uncertainties, including the trade war with China, the direction of interest rates, and the election.
“I’ve had a lot more conversations where people are planning for the potential for gathering clouds,” Blee said. Then there is the chance to do deals. “I think a lot of folks are looking for a dip in price so they can come in and make some acquisitions.”
Blee has a unique vantage point from which to observe the tech industry. SVB banks about half of all venture-backed companies overall, including about 80% of the tech companies that went public in 2019, he said. Aside from lending to the companies and VC firms, it invests in startups and VC firms as a limited partner.
In the interview, he also talked about the debate among tech companies about the best way to go public. “There’s certainly a lot of will to try to find a better mousetrap than the current [initial public offering] structure,” Blee noted. Aside from direct listings, pursued so far by Slack and Spotify, he said some companies are considering another option—going public by merging with already public shell companies called special purpose acquisition companies.
Also referred to as blank check companies, these shell firms’ only purpose is to buy other companies. For tech firms looking to go public, they can be an attractive avenue because they have fewer disclosure requirements, he said. (Digital sports firm DraftKings said on Monday it would go public by merging with a SPAC called Diamond Eagle Acquisition Corp.)
Blee started at the bank, which is part of SVB Financial Group, 16 years ago, and now lends to and advises companies with $75 million to $10 billion in revenue. His group guides companies on going public, restructuring debt, and bringing on directors and board members. Previously, he headed banking for seed, early, and midstage companies in Southern California, as well as the bank’s Midwest group. Blee talked with The Information at his office in New York City in November. The following interview has been edited for length.
Can you give me an overview of Silicon Valley Bank?
Silicon Valley Bank has been around for 35 years. We start with companies when they’re startups, two people in a garage, and before they get institutional funding—the wide end of the funnel—and try to keep them forever. So we do dramatically different things for companies depending on their stage, but in the end, the way we make money is we lend money, we take deposits, we make investments, and then we have core fee income, just like any other bank.
Right now it seems, starting in Q3, I’ve had a lot more conversations where people are planning for the potential for gathering clouds. On the [convertible debt] side, I think in August and September, was maybe the biggest two months ever [for tech companies.]...There’s an element of planning, where next year’s an election year, and who knows how everything is going to play out from a trade war standpoint. Interest rates. So people are building their cash reserves.
There’s also an element of planning for acquisitions, and I have seen an increase in M&A activity in interest in making acquisitions in the last quarter. I think a lot of folks are looking for a dip in price so they can come in and make some acquisitions.
Where are you seeing the most interest in M&A activity? Consumer internet? Delivery?
It would be the logical places. At first it was ad tech, then it was consumer, maybe it still is consumer. There’s a lot of interest in [artificial intelligence–]related stuff. A lot of that’s around talent. Some of it’s around science. You’re right about delivery. Any of these sectors or subsectors attract a lot of capital. But it seems intuitive that all the players aren’t going to survive.
On the enterprise side, it feels more stable. Still, in all, there’s increased activity there too around anticipating acquisitions.
Do you think we’ll see a wave of consolidation?
We’re seeing the activity. It’s not just conversations. We’re actually seeing an increase of activity now. And these are the deals that will close, some of them before year-end. And some [of it] is anticipatory for a potential deal next year.
When there was a dip in ’15, ’16, when there was a market correction—and that’s when you saw the crossover market investors pull out a little bit at that point in time—we saw a significant increase in acquisitions of our public clients. Because their valuations corrected more quickly, their boards recalibrated to the value, and there were quite a few more that were sold than we typically see. So we may see that again if there’s a dip.
When you say a dip, do you mean a public market dip, an economic dip, or is it something specific to VC funding?
I’m thinking about the price dip on some public equities. When it comes to the VC investing, there’s a lag. It takes six months for the prices that happen in the public markets to really translate to the private markets. So I think more immediately you’ll see it in the public markets. There definitely is a shadow, though. What happens in the public markets certainly gets reflected in the private.
What accounts for that lag?
Founders generally don’t want to calibrate to a lower value. So what happens is, term sheets come in at a lower value, it takes longer to close a deal, so it takes longer for a deal to happen. So that’s what pushes it out. It does happen.
Are megafunds going to have to pull back on the amount of money they’re giving to companies?
Last year, there were either eight or nine new megafunds, billion-plus new funds, [that] were raised. This year I think it’s three, year to date. So you see a little bit of slowing with that.
We’ve still got more dry powder than perhaps we’ve ever seen. This year’s going to be another record year on total venture funds deployed. That’s what we’re seeing. That includes venture as well as the crossover funds. You add it all up together. But that should exceed last year, which was a record.
What do companies need to do to get ready for going public?
Certainly they have to work on their controls, they have to build out their staffing, and they have to build out their board. They’ll typically want to build out an audit chair that can take them public, be with them and advise them. The other thing is just getting their unit economics straight and make sure [that] it’s a good story, it’s a durable story, that they’re measuring things in ways that will not just show the essence of the business but resonate with the street. Those things are new muscles.
What controls?
There’s a whole range of requirements that the [Securities and Exchange Commission] has laid out for companies that want to go public. It’s Sarbanes-Oxley compliance and other facets to your financial system. Most startups just aren’t highly focused on that, because they’re focused on growing and hiring staff and where do we spend our marketing dollars? They typically don’t overinvest in their finance team either, until they really need to, which is in that prepublic phase. So what they’ll typically do is bring in staff that’s been through it before and can help drive that process—bring in auditors, lawyers. So the controls are put in place and the SEC needs to see that, along with risk factors and other things, and then they get the green light to go public. But not until that point.
Some companies are looking for alternatives to direct listings, where they can raise primary shares. Are you aware of the discussions with the SEC about this?
There’s certainly a lot of will to try to find a better mousetrap than the current IPO structure. Direct listings is definitely a hot topic at the moment. I think it's not likely to replace IPOs, but it is likely to increase in popularity.
Certainly, there are many people that are trying to figure that out. You do have to solve the funding component. There are a number of people, including some folks who are talking to the SEC, saying “How do we solve that funding component, what would that need to look like, what would be rules around that?” and then there are other people, saying maybe SPACS are an avenue for some portion of these companies.
With a SPAC you still have a public component, though.
You still have a public component, but since it’s a shell, you don’t have all this disclosure because you haven’t identified your operating company yet. So it’s another way to get there.
I do believe there’s going to be innovation...with the SEC, because certainly I think the government wants it too. We’ve seen a dramatic decrease in the total number of equity issuers in the world. Every year for the last several years, we’ve had more unicorns at the end than at the beginning. They’re being created at an almost five-time clip going public, so something’s got to give.
Are you saying more and more companies don’t want to go through the trouble of going public?
The process is disruptive. They’re trying to build a business. They’re trying to really focus on everything they need to do that. There are great benefits to being public, including the marketing event, including what it does to attract and retain talent. So there [are] motivations to do it. [But] you’ve got quarterly earnings and you have that shorter time horizon you have to calibrate to. So that’s painful for some. Given the option to do that or not, you’ve seen obviously many who are choosing not to.