when the enterprise Capitalist Eileen Lee coined the term unicorn, in 2013, there were 39 of themAbout four miners every year. So far in 2021, 264 companies in the United States have reached such a valuation. Around the world, many startups turn into unicorns every day.
The staggering rate at which companies reach billion-dollar valuations is just one way venture capital busted the charts this year. “We’re investing $240 billion in VC-backed companies this year, which seemed outrageous just a few years ago,” says Kyle Stanford, a senior analyst at PitchBook. “There’s more capital and more interest in the enterprise space than ever before.”
Between July and September, more than $82 billion was invested in US startups, according to a new report on Q3 data from Pitchbook and the National Venture Capital Association. That’s about as much as venture capitalists spent all of 2017— which was, at the time, the high-water mark for venture capital spending since the dotcom boom of the early 2000s. globally, crunchbase found that Q3 totaled $160 billion, a new record high for any quarter in history. Deal size has also increased: the average early-stage deal in the US is now $20 million.
This money is being poured into all parts of the startup world, from angel investments to late-stage deals, from enterprise software to financial technology. More interest is coming from what Pitchbook calls “non-traditional” investors: in private equity, hedge funds or corporations, which have deeper pockets than the average fund on Sand Hill Road. These investors have made their way into venture capital to try to get a slice of the excellent profits. Across the market, exit value — the amount of value after a company goes public or is acquired — is at an all-time high, exceeding $500 billion for the first time in a year (with a quarter still to go). This is already double the previous year’s record.
Investors, of course, are chasing the pot of gold at the end of the rainbow. “Everyone is coming to venture out, because it has been one of the best-performing asset classes over the years,” Stanford says. Over the past year, several companies including Coinbase, UiPath and Toast have gone public with valuations of $10 billion or more.
These huge returns for investors have lengthened the VC cycle, says David Soo, who researches venture capital at the University of Pennsylvania’s Wharton School of Business. Investors see big exits, which “boost VCs’ appetite to invest in the startups of tomorrow.” HSU also noted that new avenues of liquidity, including SPAC, have made it possible for more startups to go public quickly.
HSU believes that nascent technologies like Blockchain and AI have given rise to many new startup innovations. “Other companies benefited from the Covid economy, such as some sectors of ecommerce and delivery,” he says. While those startups are getting more attention than ever from VCs, HSU cautions that the sustainability of their business models remains to be seen.
Others are even less optimistic. “It’s so foamy there. People are just throwing money around,” says Kerry Smith, founder of Unconventional Ventures, an investment firm in Austin. Smith disagrees that the current VC bonanza is driven by Startup Innovation, which He thinks that has been more or less flat over time. “I think even 1 percent of today’s startups aren’t a viable business,” he says. Smith says that while VCs expect a lot of their investments, that’s where Founders can screw up in the process. Raising a ton of capital at an inflated valuation has its own risks: If you don’t meet that standard, future investors could revalue your company and reduce your equity. can.
A foamy market also doesn’t mean anyone can start a company and expect cash. “Many companies find it easy to raise capital, but it’s still a difficult market,” says Stanford. “When there’s a lot of money to chase some deals, a lot of companies don’t get any attention out there. So it’s still been hard for some companies to raise capital.” (And some groups, such as female founders and Black founders, are still underrepresented.)
However, too many founders are enjoying the spoils of the funding frenzy. This year has set new records for “mega-deals,” or funding rounds of more than $100 million. There have already been around 600 such deals in 2021, of which 207 have happened in the last three months. Three months left, but no signs of slowdown.
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