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Jan 15, 2022

Axios Pro Rata

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Today’s Smart Brevity™ count is 993 words ... 4 minutes.

1 big thing: VC's exit-driven pandemic returns

Illustration: Sarah Grillo/Axios

U.S. venture capitalists raised a record $128.3 billion in 2021, and it’s no wonder given the prior year's near record returns of 50.1%, per Cambridge Associates.

Why it matters: The last 18 months have shattered startup fundraising records, but the latest venture performance data suggests the public listing boom has made it an equally fruitful period for their investors.

The big picture: Globally, venture capital has been the top performing private capital strategy for the last three years, according to Pitchbook’s analysis of internal rates of return over a one-year period as of the end of 2021's Q2.

  • U.S. VCs’ returns for 2020 rank second only to 1999, per CA, and are the eighth-best rolling one-year basis in the last 40 years.
  • In 2020, U.S. VCs invested $166 billion into startups (up 18% from 2019), and global VCs invested $294 billion (up 13.5% from 2019).
  • In 2021, U.S. VCs invested $330 billion, while global VC hit $621 billion.

Zooming in: According to new data from Pitchbook, North America’s 2020 vintage funds outperformed the S&P 500 (71.66% pooled IRR vs. 30.82%) and the Russell 2000 (71.66% pooled IRR vs. 40.37%).

  • 2019 North American funds similarly outperformed, as have 2019 and 2020 funds globally.

Between the lines: Much of those gains are unrealized — nearly 90% for 2020, to be exact, according to CA.

  • What’s more, about a quarter of CA’s U.S. VC index was made up of publicly-traded companies (in large part thanks to 2020 listings), nearly three times as much as two years earlier.
  • One investment manager at a major U.S. insurer tells Axios that their venture portfolio is up more than 100% over the last 12 months thanks to large tech IPOs, contributing significantly to the company’s overall income for 2021.
  • “So, ironically, private market returns are being materially driven by publicly traded companies,” Andrea Auerbach, global head of private investing, wrote last July.

The big question: Whether the public listing music keeps playing. With the recent market selloff, some companies like Justworks are already delaying their market debuts.

The bottom line: About 90% of institutional investors in a recent Venture Capital Journal survey say they intend to maintain or increase their venture footprint over the next 12 months, and 40% expect the IPO boom times to continue.

2. Good news for emerging managers too
Expand chart
Reproduced from Pitchbook; Chart: Axios Visuals

First-time U.S. VC funds bounced back last year, raising $9.1 billion in total capital, after a big drop from 2019 ($13.4 billion) to 2020 ($8.2 billion), per Pitchbook.

Why it matters: The pandemic restricted LPs to virtual meetings, worrying first-time and emerging managers about their ability to fundraise without existing relationships.

  • While more first-time funds raised in 2020 (202) than in 2021 (172), the onset of the pandemic likely made it harder for them to raise as much as they initially hoped.

Yes, but: Despite first-time and emerging managers' strong year, experienced managers (those with four or more funds) raised almost 70% of the new VC capital in 2021, on par with 2020.

  • While emerging managers were gaining ground in prior years, the pandemic seems to have given experienced managers back their fundraising edge.

What to watch: Whether LPs' appetite for emerging managers continues to bounce back, or if the faster recent fundraising pace (and a potential market correction) slows them down in the coming year.

3. Debating enterprise tech and "venture risk"

Illustration: Shoshana Gordon/Axios

A VC recently shared with me a gutsy view of some of his industry: Today, investing past the seed stage in enterprise and business software is no longer the risky bet venture capital has historically been.

  • Instead, it’s the VCs backing cryptocurrency and Web3 projects who truly embody the high-risk spirit of venture investing today, he posits.

Yes, but: Software investors (naturally) disagree, arguing that “in a bull market, anyone can value a SaaS business — but that doesn’t mean that there isn’t any risk,” Renegade Partners managing director Roseanne Wincek tells Axios.

What they’re saying: “I think if you’re going after a core business process – say, sales or HR – there’s a ton of risk in investing because the incumbents are so strong,” explains Wincek.

  • “The enterprise SaaS private market is extremely efficient, the companies are priced to perfection, so the job as an investor is finding a unique point of view.”
  • The biggest thing is distribution risk: Can this company get its product out to customers?

Between the lines: “It’s still a power law — the top companies are 90% of the returns,” says Wincek, though she admits there’s more opportunity for decent M&A deals than for some categories like consumer apps.

  • Even if 10 or 15 similar software companies get seed funding, only one or two will eventually go public and achieve a large multi-billion dollar valuation.

Yes, but: Investing in this industry has changed, says Bessemer Venture Partners' Byron Deeter, a long-time cloud tech investor.

  • "There was an opportunity in the early days of cloud computing investing—private investors didn't get the appeal of the tech and the business model... so there was an opportunity to invest at lower prices than what they'd trade in the public markets," he explains.
  • "But now the secret is out that these are great businesses—these deals are much more expensive now."

The bottom line: “When there is a correction and people end up holding a ton of mediocre $50 million ARR companies growing at 20% and worth $200-500 million, then they will realize they should have cared a lot more about what they are investing in as opposed to blindly investing in anything growing from $3 million to $9 million,” says Two Sigma partner Villi Iltchev.

📚 Due Diligence
🧩 Trivia

Female founders (and others from underrepresented backgrounds) are still getting just a tiny fraction of VC funding, even in boom times.

  • Question: True or false: 2021 was a record fundraising year for startups with female founders? (Answer at the bottom.)
🧮 Final Numbers
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Reproduced from Pitchbook; Chart: Axios Visuals

🙏 Thanks for reading! See you on Tuesday for Axios Pro Rata's weekday programming, and please ask your friends, colleagues and venture investors to sign up.

Trivia answer: True! Startups with at least one female founder raised more than twice as many VC dollars in 2021 as in 2020, per Pitchbook. Even those with all-female founder teams nearly doubled the VC dollars from 2020 to 2021.