2021 began with a bang in VC activity and ended in spectacular fashion, producing another record-setting year. While many were bullish on the industry at the start of 2021, possibly no one predicted how remarkable the year would prove to be.
US VC-backed companies raised $329.9 billion in 2021, nearly double the previous record of $166.6 billion raised in 2020. Investment activity (measured in both total dollars invested and total deal count) for seed & angel, early-, and late-stage companies all hit records, as did investment activity for companies receiving their first equity round of institutional financing and companies raising VC mega-rounds (sized $100 million or more). Total deal count also increased substantially to an estimated 17,054 deals in 2021 (up from 12,173 in 2020), but the increase in deal count did not match the pace of the surge in additional capital, continuing the trend of increasing deal sizes.
Exits were a huge part of the story of 2021, with approximately $774.1 billion in annual exit value created by VC-backed companies that either went public or were acquired. The overwhelming majority of these dollars, some $681.5 billion, was realized through public listings, a testament not only to the favorable conditions presented by robust public markets and strong valuations, but also to the availability of SPACs as an acceptable and popular alternative to IPOs. That VC-backed companies were able to generate such enormous exit value in 2021 during a time characterized by great uncertainty and extraordinary circumstances highlights the continued importance of VC-backed companies to US public markets. It is important to note that the strong IPO activity for VC-backed companies in 2021 was a result of early-stage investment from investors that in many cases first partnered with the founders 10+ years ago. Those companies have scaled over the past decade and during a strong startup and growth environment.
What partly makes 2021’s VC industry activity so remarkable is that the pandemic continued despite widespread availability of vaccines and a national vaccination campaign. At the start of 2021, many investors predicted that the world would have returned to pre-pandemic ways before year-end, but an ever-evolving virus and new variants of concern prevented those forecasts from coming true. While some investors resumed business travel to meet with founders, virtual meetings—a strange novelty for many just two years ago—have enabled investors to continue doing business and appear here to stay, regardless of the pandemic’s future trajectory.
Additional adversities the industry faces are economy-wide supply chain woes and labor shortages. The microchip shortage is negatively impacting some hardware companies’ ability to manufacture, but supply chain constraints are slowing some companies’ ability to create product across virtually all sectors. Worker shortages and the war for skilled talent are also being felt broadly and pushing up expenses through salary increases. The upward pressure on labor costs is somewhat offset by the new paradigm of remote work and the associated ability to hire people from almost anywhere. Interestingly, neither a shortage of material inputs nor labor appears to have materially reduced revenues for most VC-backed companies, since prices can largely be raised without consequence in the current inflationary environment.
The Q4 data also highlights the tale of nontraditional investor participation in the VC industry—one of the big stories of the year. In 2021, $253.8 billion in deal value had nontraditional investors such as corporate VC funds, hedge funds, PE firms, and sovereign wealth funds participate (76.9% of total annual deal value), and deals worth $139.1 billion were led by at least one nontraditional investor (42.2% of total annual deal value). While interest in VC by investors typically focused on other asset classes generally occurs whenever VC outperforms, such interest is usually transient in nature. It is not clear that such is the case this go-around, and certain nontraditional investors may be here to stay.
Looking to 2022, nontraditional investor interest and momentum will likely continue, partly due to the continued strong outperformance of VC portfolios. At the same time, traditional VC investors are flush with capital to deploy; VC fundraising topped $100 billion in 2021 for the first time ever, with $128.3 billion raised across 730 funds—$40 billion more than 2020’s previous record high. The good news for entrepreneurs is that there is a deeper and wider pool of capital sources available to fund and scale the next generation of innovative companies. The cohort of companies raising early-stage funding in 2022 and the environment under which they will scale their businesses over the coming years will determine the longevity and strength of future exit activity.
Read the entire Pitchbook Venture Monitor report for Q4 2021 here.