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Venture capital activity is running hot and on pace to top US$200b in 2021

The venture ecosystem continues to see a robust amount of deal activity and we anticipate that to continue in the second half of 2021.

In brief

  • Companies are fundraising to help scale, versus preserving or defending against the unknown like we saw in the height of the pandemic.
  • Twenty years of tech pushed into the company creation process has lowered costs to start a company; bringing thousands of angels into the investing landscape.
  • Many unicorns have gone public with outstanding aftermarket performance, fulfilling the promise of venture investment and capital return. Many more to follow.

The venture capital (VC) market continued its incredible bull run in the second quarter of 2021, with VC investment breaking the past record set in Q1 2021.VC-backed start-ups raised $72.4b in Q2, $5b above the $67.2b raised in Q1, putting us squarely on track to surpass the $200b plateau for the year.

These remarkable results were fueled by investors and companies shifting focus from funding to survive to funding for growth.

Late-stage funding continued to surge. At the halfway mark for the year, investment into late stage VC rounds has surpassed what we saw in 2020. There was also an increase in number of series A deals.

Technology continues to lead the way 

As it has throughout the pandemic, information technology driven by software continued to lead the way in attracting capital, followed by business services led by financials, and healthcare fueled by biopharmaceutical companies. These sectors rounded out the top three, which accounted for more than 76% of all activity by dollars.

The dominance of these sectors is not surprising when you consider the central roles healthcare and technology played in helping us get through the pandemic, from the development of treatments and vaccines for COVID-19 to the logistics and digital operations that provided access to products and enabled remote work for many. As we emerge from the pandemic, these sectors will continue to attract investment capital. 

Regional venture capital activity

The four top regions accounted for 72% of all VC dollars raised and set records. The Bay Area saw a record quarter at $27.7b, led by technology at $11.6b, business and financial services at $6.6b, and consumer goods at $4.2b. New York came in second at $10.9b and is having a record year with two successive double digit billion-dollar quarters. Boston was close behind, beating their best year to date and accounting for $8.6b. Los Angeles was up 35% at $4.6b, a record quarter and most likely a record year. 

Funding for growth with mega financing

Mega-round numbers (investments totaling $100m+) have been on the rise since Q1 2020 and this quarter did not disappoint, with more than 200 mega-rounds in a single quarter for the first time. Nearly 60% of all capital raised in Q2 came from 205 deals totaling $41.6b. This quarter also saw a large increase of private equity participation in the venture asset class. We’ve seen this trend over a number of years and without it, we wouldn’t be seeing the large number of mega round financing.

As a by-product of mega round financings, we continue to see explosive growth in the US unicorn population with over 160 created during the first half of 2021 . For context, new unicorns in Q2 alone was equivalent to full year 2020. Given the vast amount of available capital in the alternative asset class (including venture capital) combined with the largest population of startups we have ever seen, this virtually ensures we will see many more unicorns in the near term.

Dot-com comparisons

When I am asked if I see any similarities with the current volume of exuberant investing with the dot-com era 20 years ago, I often say the level of activity we’re seeing today makes the dot-com era look tame by comparison. There is a big overhang in the venture capital asset class in terms of available capital and portfolio companies. We are seeing many companies that have raised significant amounts of money who now have a lot more options for liquidity.

Will the unicorn era end as badly as the era did? It’s an interesting question. The difference is that many of today’s companies have real revenue and substance. However, not every company will succeed. At some point we expect to see the market cool, as all markets do. If anything, companies have been staying private too long compared to the dot-com era of going public too early.

Trouble ahead or bright skies?

Just a year ago, we were staring into the abyss of the pandemic while trying to sort out the Paycheck Protection Program (PPP), burn rates and revenue plans and what the lockdowns would mean for business and personal lives. Now, the money continues to flow and shows no signs of abating.

The situation could turn quickly for a variety of known and unknown reasons. For the immediate future however, we see more bright skies ahead. Capital formation fundamentals are strong and investment opportunities in existing portfolio companies as well as new investment themes are at record levels.

Today’s environment represents a massive opportunity for the industry. I see a very long tail ahead and while we may still be in the early stages, this is truly a transformational time in a “golden age” of venture capital and innovation. I see a very bullish outlook for the venture market over the next few years.

The views expressed by the author are not necessarily those of Ernst & Young LLP or other members of the global EY organization.

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There is a lot of exuberance in the market today. And while not everyone will be successful, there is a mountain of opportunity in early stage companies. We anticipate the VC market will continue to run throughout the year as the asset class continues to be encouraged by technology and innovation. The level of work that is pushing into venture-backed companies right now is truly unprecedented.

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