One of Silicon Valley's biggest investors just laid out a how-to guide for startups hoping to get funding in 2020. Here are 4 main takeaways from Silicon Valley Bank's report.

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Silicon Valley Bank, one of the major financial institutions catering to startups and venture capital in California's Bay Area, released its annual report on the state of private markets on Thursday.
The report summarized startup performance in public and private markets in 2019 and laid out the guidelines for success in 2020.
The report found that investors have a renewed focus on profitability, so much so that even seed-stage startups are expected to have revenue prior to outside investment. Larger companies are cutting back to meet similar restrictions.
The 2010s popularized "private IPOs," or mega-rounds of outside funding that exceed $100 million, but VCs are getting smaller slices in these late-stage rounds.
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Profitability is back in vogue in Silicon Valley.

That's the essence of a new report out Thursday from Silicon Valley Bank, the preeminent financial institution in California's Bay Area serving venture capitalists and startups alike.

After the implosion at coworking startup WeWork, venture investors were forced to step back and take inventory of their portfolios, all the while asking themselves if they were making the same mistakes as SoftBank's Vision Fund. The $100 billion fund was notorious for pumping millions — or billions in WeWork's case — into high growth startups that were losing scads of money. By the end of 2019, it was clear that strategy wasn't working out for the Japanese fund, so VCs shifted again.

Profitability is now a non-negotiable business trait for founders looking to raise capital at even the earliest stages, the report found. Here are the key metrics all founders should keep in mind when pitching investors in 2020.

1: Even the youngest startups are under pressure to have revenue before getting funding.

According to the report, founders are under more pressure than ever to produce revenue figures during the fundraising process, a metric historically reserved for later stages that accompany growth and milestones like achieving product-market fit.

The average seed-stage startup had just under $1 million in annual revenue, the report found, up from a mere $200,000 in 2016. Slightly older startups seeking Series A funding have remained relatively consistent at $1.4 million in annual revenue over the same period, and middle-stage startups need $5 million in sales to land growth funding.

The focus on revenue generations means that startups are fundraising later in their life cycles.

2: A small group of giants dominate VC funding, and an increasing amount of investment is going to startups outside the United States.

Capital has never been cheaper thanks to low interest rates and growing international investment through the likes of SoftBank, but some of the biggest funds are still seeing the biggest returns. According to the report, these mega-funds only make up about 3% of all VC funds but account for nearly 30% of all capital.

That might explain why firms like Bessemer Venture Partners and Andreessen Horowitz, both traditionally early-stage firms, announced mega growth funds in 2019. To compete with funds like SoftBank, VCs need their own stockpiles to pull from. To win over founders awash in funding offers, however, many firms have opted to specialize their growth funds, like Andreessen's $300 million dedicated cryptocurrency initiative.

A majority of that funding is ultimately going to startups outside the United States, a first since Silicon Valley Bank started tracking for the report. Most of the capital has been deployed in Asia, with money for startups in the region up 18 times what it was in 2010.

3: There's still a healthy appetite for "private IPOs," or funding rounds that exceed $100 million — but something has changed.

After disappointing IPOs by some of tech's hottest startups in 2019, many startups are like to stay private for longer to prove they can be profitable. Wall Street has, so far, remained unimpressed by rapid growth startups like Uber and Lyft but has rewarded other profit-generating enterprise companies.

Investors, then, are more willing to partake in what is known as a "private IPO," according to the report. A private IPO is any private funding round that exceeds $100 million. But the tradeoff is that investors bankrolling these rounds are taking less ownership, likely due to the number of other investors involved by the time a company reaches this milestone.

That said, the rate at which VCs reinvest in companies is on the rise, the report found. That was also listed as a result of the new crop of growth-minded mega-funds popping up from early-stage investors, according to the report.

4: Layoffs are becoming more common at growth-stage startups grappling with the new profitability mandate.

One of the biggest costs on a startup's financial statement is headcount, and it's the first line item to be reassessed when evaluating whether or not a company can ever become profitable. In highly competitive markets like the San Francisco Bay Area, high salaries and costly benefits can leave a crater in a company's finances.

So it's no surprise that the report found a sharp increase in layoffs, particularly in San Francisco, through the end of 2019 as startups struggle to right the ship. The main culprits were beleaguered startups WeWork, JUUL, LendingClub, and Uber, which together laid off nearly 1,200 employees.

When surveyed for the report, many startups said they were expecting to hire even more in 2020.