By Harrison Heaton
Momentum is the name of the game and is exactly what is happening with Venture firms more and more. Venture Capitalism is the more concentrated version of private equity and usually is targeted towards high growth start up companies and small companies that have the potential to achieve a higher rate of return than other investments they might put their capital, technological advancements, or managerial expertise into.
With this being said, Venture Capitalism has had a huge influx of momentum. Within the last year alone, venture capitalists and firms have received more cash than ever before. Despite small businesses and start-up companies struggling due to the Covid-19 pandemic and growth not being as abundant as other times, the venture industry still has taken in $73.6 billion as of the end of 2020 compared to $68.1 billion record high set in 2018. There were numerous reasons for the explosion of activity in the venture industry. However, the most valid and applicable association with the growth amid the pandemic is the inflow of a plethora of initial public offerings pouring into the market, around 407 in 2020 alone compared to 195 in 2019. A well inflated portion of these IPOs are venture capital backed meaning that they go public after being initially financed by private investors or firms. This is a strategy used by venture capitalists to recover their investments and they usually wait for an exact time to collect more and maximize their return on initial investment. The other reason for the exponential growth and record breaking revenue gains is the increase in demand and need for innovation in tech acceleration.
Venture Capitalists nationwide are predicting another year of above normal growth. This is not only due to the healthy IPO market but also due to some regulatory changes issued by the U.S Labor Department that may increase more cash flow into private equity and venture capital according to Allison Baum Gates who is a general partner at SemperVirens Venture Capital. About 3 months ago, the U.S Labor Department issued a notification regarding retirement plans such as 401ks being allowed to invest in private-equity funds, which opens a whole new market for investment which increases demand for putting money into more early stage companies and start-ups.
Regulations aren't new in this industry. These booms in the venture industry have all stemmed from regulatory change all throughout the past century. In 1958, the Small Business Investment Act (SBIC) provided venture capitalists with tax breaks to investors and the Revenue Act of 1978 lowered capital gains from 49% to 28%. 3 years later, it was lowered further to 20%, providing the venture industry more revenue than ever before. These acts played into the exponential growth trend in venture and recently this has been no different as mentioned above.
In the visual below, we can see the year over year growth broken down by quarter with the amount of investment in the Billions on the y-axis. As noted above, 2018 was the record amount venture firms and investors brought in, and the black dots represent the estimated deal count and respected revenue they are expected to bring in. This graph does not depict Q4 of 2020 which was projected and ended up breaking the 2018 record, but it shows the up trend in regards to deal value in 2020 despite Covid taking a lot on small businesses. As we can see, the trend line is sloping down in deal count. Meaning less deals are taking place but the deal value is higher than ever before. This plays into the fact that through the past several years, well established venture firms have accumulated over 75% of the total capital raised which is a huge disproportion that makes emerging firms unfavorable in the market. However, market analysis has indicated that more influxes of capital are entering the financial environment making it easier to be spread out even through these smaller firms.
With this being said, there are numerous sectors that have venture capital firms foaming at the mouth for their higher than average rate of return. The first being the emerging tech companies that have an emphasis in quicker and cheaper healthcare alongside mental health innovations that fit under the Biotechnology bubble above. As you can see this may be as a result of the fear amid the pandemic. The pandemic also leads into the other sector that is projected to be hot as the workforce advances. People lost their jobs and are desperate to learn the skills necessary to continue careers in tech such as coding, website building, etc. so workforce and skill building more specifically in the tech industry is a fortunate industry. Political figures also influence certain sectors which may be gold mines for venture capitalists including AI/machine learning companies and anything that may help reduce our carbon footprint. However, amongst all the successful talk about venture firms' forecasts, there are some concerns in regards to younger companies and the pipeline. Investors have pursued and finished roughly the same number of angel and seed deals in 2020 as they did in 2019 which may result in a slowdown in 2021. With a slowdown in angel-stage funding and seed deals, smaller companies don't have as much room to grow and receive money from investors interested in early as well as late stage investing. Therefore, leading to the rude awakening of venture capital firms not receiving the higher than average or record breaking return they experienced within the last year.
Venture capital is a growing industry that is projected to continue experiencing growth through the 2021 financial year. Due to regulatory changes within retirement investing and a healthy market for IPO growth, revenue growth is inevitable in 2021 despite some having concerns of a declining angel-stage funding and declining seed deals. Yet still, optimism is surging.
Work Cited
Munk, Cheryl Winokur. “The Venture-Capital Trends to Watch.” The Wall Street Journal, Dow Jones & Company, 9 May 2021, www.wsj.com/articles/the-venture-capital-trends-to-watch-11620578655.
Hayes, Adam. “Venture Capital Definition.” Investopedia, Investopedia, 17 Sept. 2021, www.investopedia.com/terms/v/venturecapital.asp.
Chen, James. “What Defines a Venture Capital-Backed Ipo?” Investopedia, Investopedia, 19 May 2021, www.investopedia.com/terms/v/venture-capital-backed-ipo.asp.
Written by Rachel Hallett. “These Are the Industries Attracting the Most Venture Capital.” World Economic Forum, www.weforum.org/agenda/2017/02/these-are-the-industries-attracting-the-most-venture-capital/.
Rudden, Jennifer. “Number of IPOs in the U.S. 1999-2020.” Statista, 28 Jan. 2021, www.statista.com/statistics/270290/number-of-ipos-in-the-us-since-1999/.
Comments