low risk/high reward
Trend for late-venture investments
No more hustle for the first-time funds
Private equity market performance has been outstanding over the last several years and almost all venture capital funds have gained some attractive returns. 2020 was a record year for venture fundraising, with nearly $80 billion of fresh capital, and this year is on pace to crack $100 billion, according to the Q1 PitchBook Venture Monitor.
At the same time, investors have gained enormous returns with a relatively low level of risk. Venture and hedge funds have turned their attention to an already established business with a sustainable growth model, rather than seed-round investments. Three-quarters of all VC investment dollars in the US were deployed in late-stage deals, the highest portion since 2010. Seed rounds are considered with the highest risk possible, but of course, that may bring the highest returns.
The focus on large, late-stage deals may also be the outcome of highly active IPO and M&A markets. According to Pricewaterhouse during the first 5 months of 2021, there were conducted almost the same amount of IPOs as for the whole of 2020. Hedge fund managers simply consider risk-reward ratios and refuse startups in favour of pre-IPO companies.
That creates a great challenge for small companies to receive a first-time venture capital infusion.
The other side of a coin
For investors focusing on pre-IPO companies brings even more opportunities. Surely there are the hottest private equity shares like Klarna, Stripe or SpaceX, but not everyone able to hop in and purchase shares of PE big shots. Therefore, a lot of capital was poured into smaller companies with a $1 to $5 billion valuation.
Such companies also have a sustainable business model, patents, trustworthy partners and enlarging customer base. Unicorns typically have capital from big VC funds, meaning the quality audit and management, which makes them an extremely attractive alternative investment. According to CB Insight, since December 2020 the “unicorn club” has increased by 20% with a combined value of $2,2 trillion as of May 2021.
Unicorns emerge in all markets, from the most fast-growing fintech to the hard industries like alternative energy. About the market outlook, you can read in the previous post on market leaders. As a retail investor, there is a great opportunity to enlarge the portfolio with private equity unicorns.