on November 15, 2019
5G Cellular Networks are the next big wave in technology and telecommunications, and by all indications 5G will be a tidal wave. 5G will upgrade both industrial and consumer wireless networks to 1 GBPS of bandwidth, allowing information transfer at about ten times the average Internet broadband spread in the U.S. The profits from deploying and managing 5G Networks will of course largely accrue to the major telecos such as Verizon, Sprint, AT&T and T-Mobile. But the massive improvements in communication speeds and information throughput will ultimately create new businesses in many new fields. We focus on two particular areas where we anticipate this shift to be particularly dramatic: healthcare (telemedicine, particularly remote intensive care) and the Internet of Things, (particularly as relevant to Autonomous Vehicles and Drone Delivery).
The key 5G benefits which will accrue to both healthcare and IOT businesses will be the rapid transfer of large files, or streaming of high-quality content, without causing bottlenecks for systems which are not necessarily broadband-connected. In particular, providers like AT&T already reference cases of hospitals gaining access to real-time cloud analysis of high-quality medical scans. These were previously batched into after-hours uploads to prevent bottlenecks for necessary online access to EMR, communications with patients, or high-priority patient telemetry during operating hours. We anticipate that companies such as innovaTel and VITAS Healthcare, which are already partnering with service providers to build infrastructure for hospital systems, will continue to scale and potentially consider IPO opportunities in the years following the 2021 date discussed below.
Beyond medical analytics workloads, two other medical products will see large growth from high-bandwidth wireless connections: remote surgery and high-quality video-based telemedicine. While the former is still largely in an experimentation stage, primarily in China (particularly between the Fujian China Unicom Southeast Research Institute and China Southeast Research Institute), there are early-stage companies building technical infrastructure to support both real-time video streams and control streams for surgical equipment, such as Pyrus Medical. If successful, these companies will see exit opportunities to hospital system operators, existing providers of medical technical infrastructure (EMR, such as Epic), and even technology companies seeking to establish broader footholds in the medical field, such as Amazon and Alphabet. HIPAA Video is a particular company to watch out for in this domain.
With IoT, the challenge being addressed is the sheer amount of data being produced, as well as the fact that the 5G NR (New Radio) protocol allows for far more devices to be connected to far fewer base stations. While there are already steady drips of small-scale data from edge devices, and even high-quality video and similar from wi-fi connected smart devices like Amazon Ring, the smart doorbell, there is little bridge between the two yet. Even autonomous vehicles, which depend on extreme amounts of video, radar, and LIDAR data, often rely on batched upload over wifi, which will become far less of a concern as more bandwidth becomes available to more devices. As a major provider of sensor platforms across the transportation, logistics, construction, food production, energy, and manufacturing industries, we expect that Samsara, which recently raised $100m at a $3.6b valuation will be one of the first IoT unicorns to IPO.
In a similar space to Samsara is Geotab, which specifically focuses on fleet management.
Specifically considering the transportation industry, we expect that Alphabet’s Waymo and trucking platform Convoy will see immense growth from access to low-latency connection to large numbers of edge devices, which will be used for mass data collection to improve autonomous driving models in the case of Waymo, and for freight monitoring, dispatch, and optimization for Convoy.
In the case of 4G, innovation driven by increased bandwidth really took off 2-3 years after initial deployment, with the proliferation of video calling services and social media such as Instagram and Snapchat. If that is any guide or reference point, then we can reasonably assume 2021 will be the year companies like Waymo and Convoy really leverage 5G.**
A Banner Year for IPOs Hits A Bump
The performance, or rather under-performance, of recent high-profile IPOs has brightened the spotlight on the private company valuation mechanism. The WeWork non-IPO and the underperformance of high marquee IPOs of Uber and Lyft, among others, have exposed the fault lines in the existing mechanism that many believe is too wide to ignore.
The venture capital industry in effect is at a crossroad and needs to make a decision: continue on the current road with a valuation mechanism that seems far removed from the fundamental valuation mechanism of the public markets, or change course onto a new road where valuations are not only based on robust revenue growth – which all emerging high-growth disruptive companies by definition should have – but also on a business model based on sustainable growth, responsible corporate governance, and a clear path to profitability. The choice is obvious and recent IPO performances will force the industry to move toward it sooner rather than later.
Having said that, it is important to underscore the difficulty of valuing private companies, which is more an art than science. Price discovery of disruptive private companies is in and of itself a challenging task given the unknowns, lack of true comparable public companies by definition, and a large compelling potential market opportunity ahead. Additionally, if it is a transformational company such as a Uber, Lyft, and even a Beyond Meat to some extent, price discovery is all the more difficult. The optimal solution to this challenge is for all parties – company management, investment bankers, and the public market investors – to act prudently. At a minimum, transparent financials and fair and wide access to IPO shares will minimize and mitigate the speculative and supply/demand imbalance aspects of new IPOs and ensure a more seamless debut of new issues.
Ultimately, the stakes are very high. A vibrant VC farm system is essential to produce the next Google, Microsoft, and Facebook. This is all the more critical in the face of declining numbers of publicly traded public companies. Recent misfires will prove to be a blessing in disguise for a more rational IPO market in the future.
On Course for A Near-Banner Year
Against the backdrop noted above, the recent 3Q NVCA-Pitchbook Venture Monitor Report is timely and noteworthy. The comprehensive report speaks for itself but few datapoints and observations caught our attention:
VC fundraising efforts in 2019 likely won’t top the record amount of capital raised in 2018, but investors remain flush with dry powder, and capital raised is still on pace to reach the lofty levels of recent years. Many in the industry anticipate an uptick in fundraising activity in the coming months as several VC firms try to close their vehicles before a possible recession hits the economy. Further adding to fundraising optimism are realized returns that will soon be flowing back to LPs from the many massive exits we’ve seen this year. This will enable LPs to allocate capital back into the numerous VC funds seeking it.
Outsized liquidity events are a dominating trend, with exits over $100 million making up 98.7% of value YTD. Multibillion-dollar IPOs continue to grab headlines in the VC exit market, and 3Q was no exception with six such deals closing in the quarter. This stacks up against only one acquisition of more than $1 billion closing in 3Q 2019. IPOs have constituted 82% of overall exit value YTD, a decade record.
VC fundraising focus has shifted toward increasingly larger vehicles since 2012, with 15 mega-funds closed YTD. Nearly half of all funds were sized $100 million or above, up from roughly 30% in 2014, and 9.3% of all funds were sized $500 million or above, up from 5.2% in 2017. Conversely, micro-funds (sub-$50 million) have dropped to 33.3% of the total fund count YTD, down from roughly 60% of all funds in 2012. **
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