BFV — Research Dive #3 — Exit & Deal Activity in Consumer Space

The acquisition of Dollar Shave Club by multi-national consumer goods conglomerate Unilever for a reported $1bn was the news of last two weeks in our space. DSC is expected by analysts to exceed $200mn in revenue in 2016; the 5x multiple is a premium valuation that we believe is unlikely to be the norm going forward, should M&A in the consumer world pick up. Jing Cao and Melissa Mittelman of Bloomberg posit here more specifically about the value of DSC’s business:

From Brand Foundry Ventures’ perspective, our first instinct was that the DSC acquisition represents something of a vote of confidence in our core investment thesis. We generally view direct-to-consumer (D2C) models and an online retail focus (typically higher margin than brick and mortar) as positives when evaluating startups. Given we are constantly focused on the operations of our 16 portfolio companies, sourcing new opportunities, and fundraising for BFV Fund II — keeping our noses to the grindstone if you will — we thought it makes sense to step back and look at how exits and deals in the consumer space have trended over time, both on a standalone basis and as a percentage of total activity in the U.S.

Please see Exhibits 1 through 3 below for 10-year trailing U.S. data on exits in what PitchBook defines as its “Consumer Products and Services (B2C)” category.

Exhibit 1 // Source: PitchBook and Brand Foundry Ventures
Exhibit 2 // Source: PitchBook and Brand Foundry Ventures
Exhibit 3 // Source: PitchBook and Brand Foundry Ventures

For clarification, “All Exits” above per PitchBook include strategic acquisitions, IPOs, buyouts, secondaries, reverse mergers, mergers of equals, and bankruptcies, among others.

We have a few key takeaways related to the data shown above. YTD 2016, 24% of all U.S. M&A deals have occurred in the consumer space, which compares to the 22% annual average over the 10-year period from 2006 through 2015. The $172.9bn in total post-money valuation associated with M&A in the space through the first two quarters of 2016 compares to the $658bn across all industries. That is 26%, well above the 10-year trailing annual average of 16%, perhaps suggesting valuations for strategic acquisitions in the consumer space are running hot right now relative to other sectors.

On the IPO front, only five consumer companies have gone public in 2016, a sizeable (and well-reported) drop off from 28 in 2015. What is more interesting is that those five companies represent 10% of the 49 total U.S. IPOs captured by PitchBook, well below the 18% that the consumer space average between 2006 and 2015. Simply put, the public markets have not been the preferred method of exit this year (nor were they in 2015 or 2014 for that matter, at 14% and 16% of the number of deals, respectively).

Lastly with respect to exits, Exhibit 3 shows that activity in the consumer space in totality looks to be slowing for the second consecutive year after a record, robust 2014. Total deals decreased -9.6% in 2015, and even if annualizing the 886 recorded exits in 2016 through Q2, this would represent a -25.8% decline in 2016. The reality for the consumer space is far less dramatic than those two percentage declines suggest, however: 24% of YTD exits have been made in the consumer space, which is actually marginally above the 23% 10-year average from 2006 through 2015. To summarize, strategic acquisitions have taken precedence over IPOs and P.E. buyouts over the last couple of years in the “Consumer Products and Services” category per PitchBook data. We will be watching to see whether the DSC deal has an effect on valuations in (or even the general interest in) the consumer space and D2C business models.

While the exit activity is interesting to us and the more headline-grabbing side of the story, BFV is of course effectively partnering with its portfolio companies for an anticipated ten years and beyond, so we also wanted to look at investments in the consumer space, tracking the number of deals and invested capital. Per BFV’s investment strategy, most pertinent to us are seed stage and Series A deals. Please see Exhibits 4 and 5 below for detail.

Exhibit 4 // Source: PitchBook and Brand Foundry Ventures
Exhibit 5 // Source: PitchBook and Brand Foundry Ventures

PitchBook shows seed funding in the consumer space to be $317mn through the first two quarters of 2016 on 213 total deals closed in the U.S. If you annualize these numbers, the number of seed transactions would be down -27.9% y/y from the 591 deals closed in 2015. Interestingly, again by annualizing YTD 2016, the amount of capital invested would only be down -5% from $668mn in 2015. So, slightly bigger bets are being made on seed deals y/y: $1.13mn per deal in 2015 vs. $1.49mn per deal in 2016 thus far.

In terms of percentage invested in the consumer space at the seed stage (the second chart in Exhibit 4), YTD 2016 is not showing anything dramatically different from previous years. YTD 2016, 30% of seed money deals have been in the consumer space, and 24% of seed capital invested has been in the consumer space. This compares to 28% and 26% in 2015, and 27% and 23% annual averages from 2006 through 2015, respectively.

We will finish by doing a similar analysis for Series A funding in the consumer space. YTD 2016 Series A funding has been $1.1bn for 168 deals. Annualized, the number of Series A transactions would be down -13% y/y from the 386 that closed in 2015. Likewise, annualizing YTD 2016 would put capital invested in Series A consumer deals at down -9.6% y/y from 2015. As with seed money, capital invested per deal is set to increase y/y, from $6.23mn to $6.47mn, on average.

For percentage invested in the consumer space in Series A rounds (the second chart in Exhibit 5), YTD 2016 looks quite a bit like the last ten years. YTD 2016, 22% of Series A deals have been in the consumer space, and 18% of Series A capital invested has gone to the space. This compares to 24% and 17% in 2015, and 20% and 17% annual averages from 2006 through 2015, respectively.

We’ve thrown a lot of numbers at you in this post; our apologies! This is especially true given that, after having gone through this analysis, our broad conclusion is that the consumer space today probably is getting as much attention as it had been over the previous decade, something we were skeptical of in light of the attention the DSC/Unilever deal got. But please note that there really is a ton of raw data floating around with regards to exits and early-stage funding, so please note that this is a topic that we very well may return to in future articles. We withheld plenty of other useful information to keep this a relatively quick read for you, but don’t fret: there will be more to come!

Previous BFV posts: