Every year, TrueBridge Capital explores the most significant trends in the venture capital industry, synthesizing the greatest takeaways from the year past and offering a glimpse into what’s ahead. Data from the 2021 report is particularly interesting, as it sets the stage to manage the substantially different macroeconomic conditions we’re witnessing in early 2022 after several years of strong growth. Capitalizing on the strong momentum of 2020—a year defined by the pandemic, a drastically changing consumer landscape, and particularly robust activity in the healthcare and technology sectors—2021 was unsurprisingly a record-breaking year for venture capital activity in many respects.
In this year’s State of the Venture Capital Industry report, we look at the data driving the trends that culminated in a year that set records that could stand for years to come.
State of the Venture Capital Industry
Fundraising Frenzy
While US venture capital firms raised a similar number of funds in 2021 when compared to the year before, the amount raised per fund was far greater, with a record 23 funds sized over a billion dollars closing in 2021, up from 14 in the prior year. Total capital raised also exceeded the prior year’s record and again set the bar higher, with $128.3 billion raised by 730 funds— more than 1.5x the amount raised in 2020— bringing cumulative dry powder in the industry to an all-time high of $222.7 billion.
State of the Venture Capital Industry
Despite fundraising hitting a new high, the number of first-time funds raised fell to a seven-year low, meaning there was a higher concentration of capital allocated to a set of large, established venture firms. While the average fund size continues to grow year-over-year, we also saw the average time between fundraises continue to gradually decline—going from 3.3 years in 2013 to 2.5 years in 2021.
Limited partners showed strong continued support of the venture class throughout 2021, with 90% maintaining their venture commitment or planning to increase their venture exposure over the next year—not surprising given VC returns were 50.1% for the year, ranking second only to 1999. However, with the current market conditions, it’s not immediately clear whether LPs will maintain their positions or reallocate their capital.
Money in Motion
Similar to the trends we saw in fundraising, VCs put money to work in record amounts, with 2021 seeing 27% more deals closed than compared to the previous year, and capital invested increasing by a jaw dropping 98% to nearly $330 billion. Of particular note, each quarter in 2021 outdid the last, with four new quarterly deal value records set in succession.
What drove this flurry of deals? We credit the robust pace of activity to virtual dealmaking, compressed due diligence processes, and condensed time between financing rounds.
While the rise in deal count and deal value were seen across all stages, the increases in capital invested at the early and late stages were the most dramatic. Additionally, the number of mega rounds (over $100 million) rose almost threefold from 335 to 819.
State of the Venture Capital Industry
What drove the unparalleled investment activity in later stage rounds? Companies staying private for longer, increased competition, and a robust IPO market for high-growth technology companies were the primary drivers that contributed to record-breaking investing.
Tiger Global was a hot topic in 2021, forging ahead with its latest strategy of pre-empting rounds, moving warp speed through due diligence, paying above-market prices, rapidly deploying capital, and taking a more passive, no-board seats approach. While some viewed this as aggressive, others perceived the firm’s tactics as disruptive. Much remains to be seen as Tiger and other late-stage and crossover investors have recently taken heat for high losses incurred in the early months of 2022 amid the public tech stock sell-off.
Meteoric Valuations
Late-stage pre-money valuations reached an unbelievable $114.5 million in 2021, while early-stage startups also hit a record high at $46 million. Still climbing, albeit more modestly, were seed and angel valuations. As we started 2022, there were 960 unicorns (companies with a $1 billion+ valuation), making them so common that a new phrase has risen to define the largest startups: decacorns ($10 billion+ valuation), of which there were 51 as of January 2022.
State of the Venture Capital Industry
The increase in valuations was somewhat driven by the abundance of capital chasing founders and a highly competitive environment. However, valuations, particularly at the late stage, also grew because tech companies have grown and matured even as they chose to stay private longer over the past five to ten years, ultimately leading to outsized exits.
High Profile Exits Fueling VC Growth
2020 was referenced as the greatest IPO year ever—until 2021 was officially crowned king, with a total exit value that was 2.7x greater than in 2020. The second quarter was the busiest for US IPOs since 2000, with 75% of venture-backed IPOs valued at over $1 billion.
State of the Venture Capital Industry
SPACs, which seem increasingly irrelevant today, continued in early 2021 with record filings and mergers. By early March 2021, SPAC merger volume had already surpassed volume for all of 2020, and by year end, approximately 600 new SPACs had launched.
2021’s record-setting year for exits was largely driven by a few extraordinary 2021 IPOs: Coupang ($114 billion valuation), Coinbase ($86 billion valuation), Robinhood ($32 billion), UiPath ($31 billion valuation) and Roblox ($30 billion valuation). However, post-IPO performance for many companies in the 2021 cohort proved to be lackluster, if not disappointing – an important, early signal of the 2022 downturn.
The strong run of IPOs may be over for now, but the question remains whether there will be any window of opportunity later in the year for a rebound. With HR software company Justworks and others postponing their IPOs due to market conditions, only time will tell whether high-profile tech firms including Reddit, Chime, Instacart, and others will see their IPO hopes come to fruition in 2022.
2022: The Tides Have Turned
The recent public markets downturn has shifted investor sentiment from invincible to nervous, and it’s likely that late-stage investors could slow their investment pace, taking more time for due diligence, and repricing deals. Stage-agnostic VCs could shift their focus to early-stage startups, which haven’t seen as substantial an impact in valuations yet.
Will deal activity trend negative after years of growth? How will depressed valuations after years of sky-high valuations impact fundraising and investments in the years to come?
We don’t have the answers, but what we can say with confidence is that different investment opportunities arise across market cycles, and the leading VCs are sure to adapt to changing market conditions just as they did at the start of the pandemic.
Read the full State of the Venture Capital Industry report here.
