Venture Capital on Overdrive

The U.S. economy, facilitated by strong monetary and fiscal stimulus, is now springing back to life. Along with that broad recovery, the venture capital asset class is on overdrive.

While COVID concerns remain, especially in light of the Delta variant and in particular in areas with low vaccination rates, the pandemic has been tamed broadly enough for the U.S. economy. Facilitated by strong monetary and fiscal stimulus, it is now springing back to life.  Along with that broad recovery, the venture capital asset class is on overdrive.

Still some hurdles to overcome 

The broad economy, of course, still has some hurdles to overcome. The unemployment rate in June was still 5.9%, versus 3.5% right before the pandemic, in February 2020. The June labor participation rate (i.e. those employed or seeking employment) of 61.6% was 1.7 points below February 2020.  Also, supply chain difficulties are slowing recovery in some sectors and contributing to increased inflation, which officials hope is transitory, but which is raising concerns.  

Despite those hurdles, optimism prevails

This is reflected in increased consumer spending and borrowing, rapid home sales at increasing prices, and a public stock market that continues to advance. Stock advances have been greatest in sectors most reflective of “the new economy,” especially leaders in categories that have benefited the most from pandemic-driven work and lifestyle changes. Much of those changes are expected to continue even as the pandemic itself continues to fade. 

A dramatic increase in investment in venture capital

Public equity advances have been accompanied by even greater (dramatically greater) momentum in venture capital investment. First half 2021 global venture capital investment totaled $288 billion, up 61% versus the previous record six months, which was the second half of 2020, and +95% versus the same year ago period.

Late stage funding grew most sharply, more than doubling last year’s pace; 136 ventures reached unicorn billion dollar plus valuations during the second quarter alone, versus just 23 in the same quarter year ago. 

Early-stage funding also grew more than 60% during the first half over the prior two six-month periods, and seed funding increased 40% over year ago. The median valuation of first half 2021 U.S. Series A deals jumped 27% versus the median valuation of total 2020 Series A deals, to $42 million.  

Heightened appreciation for the returns potential of innovation

These trends reflect heightened appreciation for the returns potential from investing in innovation based on strong recent earnings and huge stock price gains for major tech companies leading the “new economy.” Investors recognize the opportunities for innovation to address increasingly visible problems, needs, and opportunities. We suspect the surge in venture capital funding may also reflect concerns among savvy investors that the public markets may be being buoyed by less sophisticated individual investors and not have much further to grow in the immediate future.

A surge in IPOs may also be contributing to the source of funds for new venture capital investment. StockAnalysis.com reports 593 IPOs in the U.S. year-to-date through July 9. That is up almost 6-fold versus the 103 IPOs over the same, pandemic-slowed period in 2020 and up 57% versus second half 2020. 

But perhaps also some irrational exuberance?

While VCapital believes strongly in the return potential of venture capital investment, we suspect that some of these dramatic trends, especially the sharp rise in Series A round valuations and the surge in new unicorn births, may reflect as well some irrational exuberance.  

VCapital will not be swept up by irrational exuberance

Notwithstanding our strong belief in venture capital’s rich returns potential, we will not be swept up by irrational exuberance. We continue to believe in rigorous screening and due diligence.  We remain committed to finding the best deals possible – early stage hidden gems believed to hold home run return potential that can be bought-into at a fair price.      

We would love to hear your thoughts. Talk to us.