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10 macro trends in venture capital

There is more funding in the market, than there has been in the history of Venture Capital. Find out why and where as we enter H2, 2021

Photo by NeONBRAND on Unsplash

Now am neither a VC nor an expert, but with the ease of investing into pre-IPO startups through platforms like SoFi and Robin Hood, I try and read a bit to have a more informed opinion about where to invest my pennies in and which industries to track in terms of job opportunities.

This essay is just based on some of that secondary market research and from Series A funding data from Crunchbase, Venture Beat and CBInsights.

So let’s get started.

If you have not been living in a cave it won’t be entirely news to you that SaaS startups and venture funding has been on a tear as we weathered the pandemic.

But what exactly are the numbers as we enter the second half of 2022? What exactly are the growth trends? How many exits are actually happening? Which VC firms are really taking the market by storm? And which industries are attracting the highest investment?

What can we learn from all this?

The findings, to say the least, are quite interesting, so here we go with the top 10

#1

Massive growth in the number of new unicorns being created

We are minting unicorns at a faster pace than even before

  • Q2 of 2021 saw the birth of 136 new unicorns globally — that is nearly 6x of the 23 unicorns born a year ago in Q2 of 2020 , and already higher than the 128 unicorns born in all of 2020.
  • Companies entered the unicorn club at an average valuation of $1.6B in the first 6 months of 2021, up 33% from $1.2B in 2016.

#2

Incredible upward spike in financing by Venture Capitalists to get into the best deals

Global funding to startups smashed new records in Q2 as VC and PE firms competed massively to get into the best deals.

  • Funding was up 157% compared to Q2’20.
  • This marks the biggest quarter for dollars raised in the last decade

#3

High momentum in the US startup scene with US VCs doubling down on investments

While its true that Europe and Asia have come up admirably in courting and creating startup’s the US is still ahead by a fair margin

  • The new global high was driven by a record quarter for funding in the US, with $70.4B raised in Q2'21.
  • This puts 2021’s half-year total for US funding at $138.9B raised, compared to 2020’s year-end total of $149.3B

#4

Increase in Series A median funding valuation

Series A or Seed stage is generally the first round where VCs bet on promising startups and a double digital growth in median valuation shows how much FOMO is out there in the market around missing out on the next big thing.

  • US valuations across the board saw an increase, most notably at the Series A stage
  • In Q1 2021, the median Series A valuation climbed to $42M as capital competed aggressively for the best deals
  • In 2021’s first 6 months, Series A valuations grew 27% YoY

#5

YoY doubling of investment in Silicon Valley (the global epicentre of SaaS startups)

Let’s admit it. Silicon Valley and Sand Hill road are the reason behind the many multi billion dollar companies that have been created in the last 15 years. The culture, and network effect matters.

  • Silicon Valley, including San Francisco, is still by far the largest tech hub and was up 93% YoY in funding
  • Goes to show that when it comes to voting with the wallet, silicon valley and San Francisco still rule the roost.
  • There may be a media story around everyone leaving for Miami, but maybe time will tell if Miami becomes the most important startup investment hub in the US.
  • By comparison, New York raised $11.2B, Boston $7.8B, Los Angeles $6.0B

#6

22% or 1/5th of the entire global funding poured into Fintech

Industries matter, because they go to show where the maximum innovation and job creation is going to happen.

  • Global fintech funding reached a new high of $33.7B in Q2'21
  • This was a growth of 191% YoY
  • Fintech companies represented 22% of total global funding this quarter

#7

100M plus series A rounds tripled YoY

More Series A insights. A 100M Series A round is by all definitions a mega round for a company getting its first cheque. And yet, 100M Series A rounds became more and more heard off in in the first half of 2021.

  • Compared to Q2 of 2020, the number of $100M+ mega-rounds nearly tripled, hitting an all-time high of 390
  • This is the second quarter to surpass the 300 mark, with the previous record held by Q1’21’s 367 mega-rounds
  • In total in H1, there were 757 100M Series A funding rounds which means in the secondary markets there are 757 companies with close to $1B valuation created in the first half of 2021 alone

#8

Marginal double digit drop in VC investments into Chinese companies

With Chinese Government and regulators cracking down on local internet giants and crypto mavericks funding lost a little bit of steam.

  • Funding to China-based companies has been on a decline this year
  • There was an 18% drop from Q4’20’s peak of $27.7B
  • Deals also fell by 5% over the same time period as the chinese government cracked down on legislature and regulation internally

#9

Massive momentum, competition and speed in VC deal closing

There is no doubt based on data available to confirm that the best time to start a company for anyone is now, especially if it’s in SaaS. It’s like VC’s are competing at break-neck speed to close deals and term sheets.

  • Tiger Global was the most active investor globally in Q2, 2021. Tiger increased its global investments by 8x YoY, hitting a record-high of 81 (or 1.3 deals per business day, excluding follow-on investments).
  • Andreessen Horowitz and Sequoia Capital China rounded out the top 3 investors of the quarter

#10

M&A/IPO exits up 109% YoY

Without successful exists, Venture Capital can’t thrive and without that growth can fall and innovation can get stymied. But data says that VC’s are exiting successfully like never before.

  • The number of global exits (IPOs and M&As) increased 109% YoY, reaching an all-time high of 2,893
  • Global IPOs peaked in Q2 2021, up from the previous high of 2,81 in Q1 2021
  • Didi Chuxing’s IPO at a valuation of $73B was the largest exit of the quarter

Causes and plausible reasons

So now that we have seen some truly eye popping, chart topping numbers, let’s take a moment to let it sink in.

Let’s then try to unpack a little bit of the why. Why is this happening? What may be the causes? How and what should we, the common man take away and leverage from this?

Why this sudden growth in unicorn valuations?

While in Q2 of 2021, there were just 23 companies which got valued as Unicorns, by Q2 of 2022, that number had grown to 136 companies. A YoY increase of 491 %.

So what drove this growth?

Well — success breeds success and the pandemic had a definite role to play in the massive venture activity we have witnessed the entire past year.. Across the world governments rolled back interest rates and doled our trillion dollar relief packages and stimulus bills. There is more liquid money in the market right now, than there was ever before in the last 10 decades.

Also the pandemic forced companies to become digital and SaaS first which opened up a plethora of opportunities to smart entrepreneurs to get started with great ideas. And as there were more entrepreneurs with great potential jostling for attention, VCs were forced to cast their net wider to improve their returns to investment projections.

They had to spend more and do more deals to better their portfolio risks.

Will all these unicorns survive? No. But with so much money riding on them, so many net new jobs created, failure becomes a problem for the entire economy and not just VC firms.

It becomes like a government bailout situation.

Why this Increase in Median value of Series A funding in the US venture ecosystem?

From 33M last year to 42M this year, the median valuation amount in Series A funding increased by 27%.

As more and more VCs competed on the same funding rounds and cap tables with entrepreneurs who went out with their pitch decks, they were forced to spend more, on the same deals than they would have a year ago just to close term sheets and secure their portfolio.

This pushed up the median value of Series A financing and if this continues. then there will be more capital for bootstrapped entrepreneurs to scale and expand right from the get go. But what it also means it’s as much of a borrowers market as it is a lenders market.

Because now people have more choices.

Why this frenzied attention to Fin-tech?

Think about this — 1 out of every 5 dollars in venture investing went into FinTech.

Till last year Q2, consolidated global venture funding into Fin-tech startups was around 11.6B while this year that number has almost tripled to 33.7B — a YoY increase of 191 %.

So why this love for fintech? If we see the trends, almost every SaaS company is also becoming a payment company. To increase retention and push up ARR, everyone is getting into multiple forms of payments like Buy Now Pay Later, different forms of payment options, different forms of currencies and wallets to remove the barriers to payment and easy financing.

Also payments is a great place to be in, to scale and diversity into other offerings in case a pivot is required. In short payments is customer identity and customer buying profile and everyone wants in on that.

Add to it the rise of crypto, NFT and other forms of digital currencies, this is one place that no one is truly sure of in terms of future course. So every startup is gearing to have a foundation layer ready which gives them the ability to expand, diversify, increase offerings, ease financing and adapt to the future.

Why all this frenetic competition among VCs to close deals and term sheets?

If you see the news it’s like almost every week VC firms like Andreesen Horrowitz and Tiger Global are investing in multiple new companies.

A few years ago there were only a handful of VCs for you to pitch your idea to. But with billion dollar exits becoming more and more commonplace, angel investing has exploded. Anyone and everyone today is an angel investor. You can start a fund tomorrow with 3 of your friends and a few million in capital and all you need are one or 2 exits to retire in the Bahamas.

On top of that, companies are banding together to create SPACs and go public. In short VCs are under enormous pressure in losing their monopoly towards dictating the market terms.

And that is really fragmenting the market into multiple niches.

Competition they say, unleashes innovation and growth. On one hand, easier access to capital will spur more and more entrepreneurs to come up with new ideas, some of which will truly change the world we live in. What is equally true is that , there will be lack of due diligence and over time there will be consolidation around more process and regulation that will make the system a little bit more predictable. The market right now is so reactive and volatile that it is also creating massive inequality amidst industries and sectors.

I mean we all do need other kinds of companies beyond SaaS.

So, while some sectors are booming, many other essential sectors are being starved of funding, causing job losses, economic crises and civil stress. Retraining and re-tooling are easier said than done.

Why did $100 million rounds triple year on year even at Series A?

According to Q2 data of last year only 132 deals had funding over 100 million, while this year we have already had 390 deals where companies have had in excess of 100M in funding, again a YoY increase of 195%

But why? Well am no expert and no VC but this is what I think.

Any company which is financed at 100 million immediately almost gets a 1 billion valuation (at the least) and the economics of driving a 1 billion dollar company towards M&A , SPACs or IPO are much easier. This existentially makes exists for VCs a tad bit faster if the company gathers traction. Sure there will be failures here as well, but it’s just a safeguard. Also if multiple 1 billion dollar companies start failing, then the resulting economic fallout of job losses, unemployment forces governments to intervene. The risk gets diversified after a point in time. It becomes too big to fail.

Rankings

Ok so now that we have spent some time on some trends and plausible reasons, let move on to some rankings and lists

The top 5 VC or PE firms who are leading the charge in terms of investments made

  • Tiger Global with 81 investments
  • Andreessen Horrowitz with 64 investments
  • Sequoia with 62 investments
  • Accel with 60 investments
  • SoftBank and BPI France with 53 investments

What about Exits?

Global exits in H1'21 are already 76% of 2020’s full-year total. With 5203 M&A’s and 503 IPOs there have been more than 5700 successful exits for VCs this year and its just H1.

The top 5 exits in Q2 2021 have been

  • Didi ChuXing — the mobile commerce Chinese giant) IPOd with a exit valuation of $73B
  • Coinbase — the Payments unicorn IPO’ed with a exit valuation of $65.3B
  • UiPath — the robotic automation company IPO’ed with an exit valuation of $29.1B
  • AppLovin — the mobile app growth and gaming company IPO’ed with an exit valuation of $28.6 B
  • Tokopedia — the travel company did a merger with an exit valuation of $18B

And finally the top 5 valuable unicorns as of Q2 2021

  • ByteDance (the company behind TikTok) with an IPO valuation of $140B
  • Stripe the payments company with an IPO valuation of $95.5B
  • SpaceX — Elon Musks’s Space exploration company with an IPO valuation of $74.8B
  • Klarna — the Swedish eCommerce major with an IPO valuation of $45.6B
  • Instacart — The grocery delivery upstart with an IPO valuation of $39B

So there you have it. The top macro numbers at a summarised glance. While the world starts its recovery process from Covid, and travel wrangles with Delta to sputter a restart, VC funding is on fire and there is more money in the market than ever before. If you ever thought about when was the right time to start your own company, right now is probably the best answer you will get.

And if you ever lose hope, remember, Tiger Global is doing 1.3 deals per day!! SO the opportunity is there if you have what it takes to make it.

So what can we take away from all this? Which industries will create the maximum jobs based on all this funding? Which careers are going to be the most in demand? Which problems do new founders need to focus on based on market trends?

In subsequent essays, I will try to summarise some of my own thoughts and some more secondary research.

Sources:

  • Crunchbase Pro Database
  • CBInsights multiple reports

About Me:

In my day job I drive growth at Google. Ex @ Adobe, SAP, LinkedIn and IBM

We all build diverse interests in hacking through life.Here, I write occasional essays on investment, self improvement, market trends, venture capital, growth, art, music and occasional football. Follow me on twitter @hackrlife or on my substack here.

If you are interested in books and historical letters check out the Quotatist.

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Dev

Work @ Google. Ex Adobe, SAP, LinkedIn, IBM — Musings on growth, art, investing, life and a few other interests