Need for smart, public, earliest stage money never greater, latest VC data indicates

If venture capital was water, then sea levels continue to rise.  Yet more and more innovation-based startups across the country seemingly are being left high and dry as private venture capitalists continue to push their money into bigger, later stage deals. Investors seem increasingly set to cruise toward cashing in on the currently hot exit path of public listings. All of the key metrics in the latest Pitchbook-NVCA Venture Capital Monitor suggest many of the youngest innovation opportunities have been left out of recent VC activity, a trend that typically hurts those geographic areas receiving less VC than national averages. 

Pitchbook reports the total venture capital invested during the first quarter of 2021 nearly doubled the amount invested in Q1 2020, logging 92.6 percent more dollars flowing into portfolio firms. This explosive growth comes in the wake of the record year that 2020 proved to be for the VC industry.  Fundraising “also proceeded at a record-setting pace with $32.7 billion raised across 141 funds. For perspective, $79.8 billion was raised in 2020, the current annual record,” the authors write.

The survey found a record three-out-of-every-four dollars invested during Q1 2021 went into late-stage deals. Meanwhile the number of first financings continued their declining share of total investments.

And the news for the startups seeking first funding from VCs gets worse in the report. The average deal size for the 722 first financings came with a price tag of $4.7 million. More than 70 percent of early stage deals come from rounds in excess of $25 million, on pace to set a new record. One in five went to deals over $10 million. Both seed fund and angel deal counts appear to be continuing their downward trends as well.

Just as the industry is concentrating on bigger late-stage deals, and the little early-stage activity remaining is concentrating on larger first financing, new money flowing into VC also seems to be concentrating on the largest funds, according to the latest Monitor. Nearly 50 percent of all capital raised in the quarter was netted by funds already in excess of $1 billion.

(In our maritime analogy, these are the enormous container cargo ships that won’t even consider the majority of ports on our shorelines — the ports simply don’t or can’t conform to the demands of these oversized vessels. And they are exceptionally hard to turn around once they’ve set a course.  More streamlined, agile and multi-goal-focused vessels are required to navigate the opportunities in these overlooked harbors.)

Back on dry land, the evolution of the risk capital market playing out as each new quarterly Monitor report indicates might make perfect sense to economists, but can be seen as a failure on several levels for American competitiveness through innovation and long term, more equitable prosperity. For example, there is a growing disparity of opportunity associated with this critical financial vehicle. Pitchbook reports female-founded companies continued to receive a declining share of VC deals and dollars and their valuations dropped.

The report also reveals that single-purpose acquisition companies (SPACs) saw historic annual activity in Q1 alone. Approximately $83 billion was raised across 281 SPACs — beating last year’s figures of $70 billion and 230 SPACs, and completely blowing away 2019’s $11 billion across 53 SPACs. Not surprisingly in light of this rapid increase in activity, the Securities and Exchange Commission (SEC) has been scrambling to boost its communications and regulations around the investment vehicles and issued three clarifying statements in the last three weeks alone.