Venture capital trends to watch
Last year, venture capitalists raised more liquidity than ever before – and many in the industry expect the momentum to continue.
Even though 2020 has been terrible for countless small businesses and startups, the venture capital industry raised $ 73.6 billion in the United States in 2020, surpassing the previous high of $ 68.1 billion set in 2018. , according to PitchBook Data Inc., a financial data and software company. that follows the industry. The activity was supported in part by investors who were bursting with capital thanks to a thriving IPO market, as well as strong demand for innovation and digital acceleration amid the pandemic.
Here’s a look at what venture capitalists and entrepreneurs see as the top trends to look for in the coming year.
Another year of strength
Venture capitalists predict another bumper year for capital raising, leeward of a healthy IPO market and favorable regulatory changes that open the door to new investment.
“Venture capital fund returns in 2020 have been spectacular relative to public market returns,” says Steven N. Kaplan, Distinguished Professor of Entrepreneurship and Neubauer Family Finance at the Booth School of Business at the University of Chicago.
In the future, he expects more money to be invested in the venture capital of endowments, pension funds and wealthy families who may have been more cautious of this. type of investment in the past.
Several regulatory changes could also allow more money to flow into private equity and venture capital, says Allison Baum Gates, general partner of SemperVirens Venture Capital in San Francisco.
In June, the United States Department of Labor issued a newsletter stating that, under limited circumstances, it will allow defined contribution pension plans, like the 401 (k) s, to invest indirectly in funds. of private equity. In August, the U.S. Securities and Exchange Commission changed the definition of an accredited investor, giving more leeway to the types of people who could legally invest in venture capital. A third development: the amendment of the Volcker rule, which previously prevented banks from investing in venture capital funds.
“This creates more demand to invest in private start-ups,” says Ms. Gates.
Haves vs destitute
Well-established venture capitalists, some industry watchers, should get most of the money to market.
In recent years, established companies – those that have started four or more investment funds – have been more successful in attracting capital than emerging companies, which have started three or less. In 2020, established companies accounted for almost 75% of total capital raised for venture capital funds. That’s the biggest chunk of the total that this group has held since 2012, according to PitchBook.
On the flip side, according to some industry watchers, there is more money coming into the ecosystem, which suggests that it could be spread over a larger number of participants.
Possible pipeline issues
There are concerns about how young companies will fare in terms of funding this year. Despite the shocks at the start of the pandemic, investors closed about the same number of angel and seed deals in 2020 as they did in 2019, according to PitchBook estimates.
Michael Chow, director of research at the National Venture Capital Association, raises the possibility of a slowdown in seed funding and angel funding in 2021, which could lead to pipeline problems, he says.
“Without the start-up investments and angel investments, there is naturally a smaller group of new businesses that have the potential to grow, mature and eventually receive additional funding later in fee-based cycles from focused investors. on early and later stage investments, ”said Mr. Chow said.
Some experts continue to be concerned about the ability of minority and women-run businesses to raise funds from venture capitalists. It is only in recent years that a concerted effort has been made to encourage women and minorities in tech companies, so the pipeline of potential founders is still not where it needs to be, Mrs. Gates said. Additionally, more than ever, investors and fund managers tend to want founders with experience, which can make things more difficult for women and minority-led companies, which are newer to the industry. , she says.
Granted, women-founded businesses set a record for transaction value in 2020, but that’s for fewer transactions than a year earlier, according to PitchBook. The founders raised $ 22.1 billion out of 2,418 deals compared to $ 21.8 billion out of 2,751 deals in 2019. Overall, nearly a quarter of all venture capital deals went to companies with at least one female founder, according to PitchBook.
The business of Special Purpose Acquisition Companies (SPACs), designed to go public without going through the traditional IPO process, shattered records in 2020, with 250 companies collectively raising $ 75.1 billion. dollars, compared to 2019, when 53 PSPCs raised $ 11.1 billion, according to PitchBook. PSPCs are generally made up of business leaders who have specific expertise and who intend to enter into agreements in this area.
As the number of PSPCs increases exponentially, purchasing opportunities will increase. This could bode well in 2021 for venture capital funds looking for an exit strategy, Dr Kaplan said.
It remains to be seen whether PSPCs are here to stay as a serious alternative to IPOs. Mr Chow says 2021 will continue to test the model if, for example, returns are lower than the traditional IPO model and some PSPCs find themselves empty-handed in their search for acquisitions, amid heightened competition. .
Sectors to watch
Several areas will be hot in 2021, according to venture capitalists and entrepreneurs.
There will always be opportunities to invest in emerging technology companies, including life science and biotechnology companies. Venture capitalist Ms. Gates also sees many opportunities in technology focused on mental health, lowering the costs of delivering healthcare and providing benefits to on-demand workers. Additionally, there will be a wave of new workforce development tools focused on re-skilling people whose jobs were lost or replaced by technology during the pandemic, she said.
Other areas to watch include machine learning and AI, as well as clean tech, given President Biden’s commitment to implementing the changes needed to minimize the impact of global warming.
Marc Suidan, the technology, media and telecom mergers and acquisitions leader at PwC, expects new regulations, which could mean bringing solutions to market in areas such as cybersecurity, privacy , antitrust laws, commerce and taxation, he said.
Janice Taylor, partner at E99 Ventures, expects more money to be invested in social enterprises from non-traditional investors, such as private companies that manage money for wealthy families and high net worth individuals.
“Before, there was only one way” to finance yourself, says Taylor. “We would have to go to Silicon Valley and find the money there. Today there are so many other types of funds to meet the needs of a founder. Founders must abandon this old model and find alternative ways to market their startup to the world. “
Ms. Winokur Munk is a writer in West Orange, NJ. She can be reached at [email protected]
Copyright © 2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8