4 Trends Driving the Venture Capital Industry in 2021
In the first quarter of 2021, global venture funding reached an all-time record of $125 billion.
This is an area of the economy that is always changing. And trends in this industry impact which companies and sectors will be dominant for years to come.
If you want to understand the most important trends affecting the venture capital industry in 2021, read on.
1. The Number of Unicorns and VC Mega-Deals is Increasing
A “unicorn” is a privately held start-up that has reached a $1 billion valuation. It used to be a term that described a very small and exclusive cohort of private companies. That has now changed.
Searches for the term “unicorn” have risen by 1500% over the last decade.
Looking at CB Insights’ data, we can see that there’s at least one hectocorn on the list (a privately-held start-up worth at least $100 billion). That company is Bytedance, the Chinese company that owns the popular app TikTok.
Although Bytedance is the only true hectocorn right now, two American companies – Stripe at a $95 billion valuation and SpaceX at a $72 billion valuation – are coming very close to making the leap.
Also on that list are 33 decacorns (companies worth at least $10 billion). Some of the more well-known include Squarespace, Robinhood, Instacart, Epic Games, and Chime.
What’s the reason for this rapidly-growing number of highly-valued startups? One reason is that venture capital funding rounds are getting larger.
The number of venture rounds worth at least $100 million has been steadily increasing since the second half of 2020. There were 327 of these mega-deals in 2020 (just less than half of total VC deal volume).
And January of 2021 saw a record 102 venture-backed investment rounds worth $100 million or more.
Number of funding rounds worth at least $100 million committed.
December of 2020 and January and February of 2021 all saw record funding compared to prior years.
Monthly venture funding.
A lot of this new capital is coming from a few massive funds.
The median fund size in the U.S. grew by 69% in 2020 to $75 million – the largest since 2008. Even in an impressive year like 2020, there were significantly fewer funds involved in venture fundraising.
Total number of funds involved in venture financing each year.
In fact, Pitchbook also found that 15% of VC funds raised in the first nine months of 2020 were part of funds worth $1 billion or more.
2. Equity Crowdfunding is Giving Normal People Access to the Venture Asset Class
Venture capital firms have dominated the startup world for as long as there have been traditional “startups.”
Now, investors from all other areas of the financial and business world are looking to gain access to the impressive returns enjoyed by the venture community.
Equity crowdfunding has begun to play a huge part in this. Basically, equity crowdfunding platforms allow non-traditional (and now even unaccredited) investors to have access to startups by pooling their money with other small investors.
Search interest in “equity crowdfunding” is up by 5000% over the last decade.
There are basically two ways that equity crowdfunding platforms allow unaccredited investors to access private companies: Regulation Crowdfunding (CF) and Regulation A+.
In 2016, a section of the 2012 JOBS Act called Regulation CF came into effect. This section allowed unaccredited investors to invest in private companies through equity crowdfunding platforms.
The platforms have to be broker dealers or funding portals registered with the SEC. And anyone can now invest using these platforms, regardless of their net worth or income.
There is, however, a cap on the size of each investment made in a company. Before 2020, that number stood at $1.07 million. But as of March 2021, the SEC raised the cap to $5 million in a 12-month period, giving unaccredited investors access to significantly larger funding rounds.
And Regulation CF has led to a surge in equity crowdfunding since 2016. In 2020, Crowdwise estimates that $214.9 million was raised through equity crowdfunding platforms. That’s more than double 2019’s number ($104.7).
In fact, 2020’s number is more than the total equity crowdfunding amount raised in 2016-2018 put together ($194 million).
Regulation A+, on the other hand, allows private companies to basically do a mini-IPO. The companies can raise (as of March 2021) up to $75 million from both accredited and unaccredited investors.
While a private company can do this on their own, they typically raise the money through broker-dealers or crowdfunding portals – like those we will discuss below.
A Regulation A+ offering allows private companies to raise significantly more money from the public (think later venture rounds) but subjects them to higher reporting standards than Regulation CF.
WeFunder is the largest company in the Regulation CF funding space.
Searches for “WeFunder” have grown by 233% since 2016 – when Regulation CF went into effect.
WeFunder allows investors to join a pool of funds with as little as $100. And the company claims it has now attracted close to a million users.
By the end of 2020, WeFunder had provided about $188 million in funding for startups and small businesses. And these companies have attracted over $5 billion in follow-on investments after WeFunder invested in them.
In 2021, WeFunder is expecting to contribute more funding ($350 million) than it has in its entire history.
StartEngine is the second-largest equity crowdfunding platform in the Regulation CF market. But it is the largest in the Regulation A+ market.
Searches for “StartEngine” have grown by 385% over the last five years.
The company has now raised $300 million for startups and other private companies since its inception. In 2020 alone, StartEngine raised $147 million for private companies (a year-over-year growth rate of 236% compared to 2019).
The company counts Shark Tank star Kevin O’Leary as a strategic advisor (you may have seen his commercials on channels like CNBC).
And StartEngine has even staked its own valuation on Regulation A+ funding. It went public in October 2020 through a Regulation A+ offering.
Since crowdfunded companies typically have illiquid shares and don’t want to comply with onerous SEC reporting requirements on public exchanges, StartEngine created its own secondary market in October of 2020 for Regulation A+ and Regulation CF funded companies to trade on.
After StartEngine and WeFunder, Republic.co is probably the third largest equity crowdfunding platform in the Regulation Crowdfunding space.
Searches for “Republic.co” have grown by 5700% since 2016.
Overall (including Reg. A+ and CF), Republic has raised $200 million in over 250 deals on its platform. And much of this has come in the last year.
Republic has even raised $2.35 million and $11.2 million for popular private companies SpaceX and Robinhood through its platform.
In March of 2021, Republic itself raised $36 million in a Series A round to fund its ongoing growth. This is especially important since the equity crowdfunding caps are rising in 2021.
The three leaders put together – WeFunder, StartEngine, and Republic.co – accounted for more than 80% of the Regulation CF funding in Q4 2020.
3. Venture Capital is Leaving Silicon Valley
Traditionally Silicon Valley has captured the lion’s share of the venture capital and startup market. Recently, however, a shift has begun. More and more of the VC industry is moving from Silicon Valley to other parts of the U.S. and the world.
Search interest in “Silicon Valley” has decreased by 71% over the last five years.
In 2020, 22.7% of the total venture capital funding took place in Silicon Valley, the lowest it’s been in over 10 years. In fact, according to CNBC, Silicon Valley’s share of total funding has been on the decline since 2006.
Part of the reason for this is the fact that a lot of startup founders are finding it less desirable to live in Silicon Valley. More and more work can be done remotely. And the Bay Area housing market is making it difficult for employees to find Silicon Valley livable.
Venture firm Initialized conducted a survey in February of 2021 and 2020 to see where the founders of their portfolio companies would base a startup if they had to do it again. The findings were instructive.
Before COVID-19, the vast majority of the respondents chose Silicon Valley as the most desirable location.
By February of 2021, the most popular choice wasn’t a location at all. Instead, 42.1% of respondents (a higher number than those that chose the Bay Area in 2020) said that they would prefer their company to be completely remote.
While Silicon Valley remained the runner-up, Austin (a city that wasn’t listed in 2020) is now tied with New York for the third-most desirable location. In addition, Seattle is basically out of the running. And cities like Denver and Miami are now considered contenders.
In fact, a fair amount of VC money is leaving the US altogether.
Put in raw terms, VC investments outside the Americas totaled $136.2B last year.
Asian investment platforms are seeing significant growth.
According to Crunchbase, there are 3.99K VC investment organizations based in Asia.
41.66K companies are contained in this collective portfolio.
Startup Bangladesh is a venture capital fund founded by the national ICT Ministry.
Searches for Startup Bangladesh are up 137% in the last 5 years.
The fund intends to invest in 50 startups by the end of the year.
The group makes worldwide investments. Last year, it acquired a Swiss sensor company from Siemens.
Wise Road was a founder of the Financial and Information Technology Alliance, a global group of more than 100 finance and technology companies.
4. VC’s are Cashing Out Through a Record Number of Exits
2020 and 2021 have seen a record number of IPOs and SPAC transactions. Both the number of deals and the amount invested have been enormous.
In fact, 2020 and 2021 have seen the most IPOs since the 2000 tech bubble.
Source: Stock Analysis
Keep in mind that we’re only a little over 3 months into 2021.
Of the IPOs in 2020, 103 of them involved venture-backed companies. The group came public at a collective valuation of $220 billion – the highest annual exit value ever.
In addition to this, the number of venture-backed companies that are being acquired has increased over the past year as well.
Monthly venture-backed acquisitions and their value.
The number of SPAC IPOs in 2020 and 2021 is also unprecedented. There were 247 SPACs created in 2020 (more than 4x the number of SPACs in 2019). And total deal volume increased by more than 6x 2019’s amount, growing to $75.39 billion from $12.01 billion.
Source: Skadden Arps
A Special Purpose Acquisition Company (SPAC) is a vehicle through which investors can take a company public. Essentially, the SPAC sponsors raise capital for acquisition by issuing stock and warrants in a blank-check company. The company has a mandate that requires it to complete an acquisition in two years or it will be forced to return capital to the shareholders.
Search results for the term “SPAC” have increased by 221% over the last five years.
Because SPACs can acquire private companies, this method of going public can be quicker and less onerous than a traditional IPO.
Overall, just shy of half of 2020’s total IPO market by volume was represented by SPACs.
Whether it’s the size of VC deals, the number of IPOs, or the rise of SPACs, it’s clear that the venture capital industry is changing.
The financial aspects of the market as well as the demographics are starting to affect how startups are funded.
Keep an eye on these trends in 2021. They are only becoming more important.