The VC asset class is showing relatively strong growth amidst market uncertainties around the world, seeing historic returns while demonstrating unprecedented levels of liquidity and growth. Fuelled by a maturing ecosystem, investor asset reallocation, and a renaissance of new expert fund managers, VC has recently been the top-performing asset class and is expected to continue its strong performance in the years to follow.
As shown by Pitchbook’s data below, venture capital has outperformed every other major asset class in the last three years and has demonstrated noteworthy growth in the previous decade.
In this time, venture capital and the startups it backs have proven to be a valuable asset with many success stories visibly changing the world we live in today. Most people can feel firsthand the net-positive effects of venture capital, whether it is the convenience offered by food delivery and taxi-hailing services or the notable strides taken in electric vehicles and alternative meats, all of which are venture-backed.
New venture liquidity
Importantly, not only is the asset class showing high returns for investors, but we are also seeing increasing liquidity with a thriving secondaries market, estimated to be around $70B in the US. Consequently, venture capital’s previously inherent long time horizon is slowly diminishing, further cementing its attractiveness to investors and institutions. Also contributing to the unprecedented levels of liquidity is the sharp rise in the VC-backed startup IPOs in recent years. As shown by the data below, IPOs within the United States reached record high numbers, with 407 companies going IPO in 2021 generating $615B, while global VC-backed IPOs reached $1.38T.
Interestingly, these figures have not reached such levels since ‘The Sarbanes-Oxley’ act of 2002, which “mandated strict reforms to existing securities regulations,” making it much more challenging for companies to list publically. Around the world, prominent backers of VC are also seeing a much quicker time to exit; notably, in Asia, some companies achieve unicorn status in as little as two years and can exit within eight
Re-allocating to venture
Amidst these changes, investors worldwide are focusing on venture capital, which has consistently been delivering high cash-generating businesses. With the most recent crash in cryptocurrencies wiping over $1T in market value, investors are growing weary and choosing to reallocate capital to more productive assets, such as venture capital. This is evident in the rise in VC funding worldwide, which rose to 2021 to $671B. As shown below, both VC deal count and financing have nearly doubled year-over-year in the US, with early-stage first-time financings also taking a notable uptick.
Considerable levels of VC investment in 2021 have seen many new entrants and investors looking to increase the allocation within their portfolios to the venture capital asset class. This shift is multifaceted as both highly sophisticated institutions such as endowments as well as High Net Worth Individuals are weighing up their exposure to the asset class and reallocating their capital to participate in the creation of global unicorns and attain a stake in these prized assets of the present and future.
Rise of venture-backed unicorns
A Cambrian explosion of startups is observed across the world as founders are evermore determined to incite positive change through the companies they build. Though there is no global census that counts startups, we are seeing exponential growth in the number of startups worldwide via the Founder Institute. Models looking to estimate the number of startups also lay credence to this, predicting exponential growth in the number of tech company formations.
In conjunction with the uptick in new company formations, the maturing VC ecosystem now provides more founders with the necessary financing, expertise, and resources required to scale their companies. Investments in growth stage venture capital also drive a large share of the ecosystem’s investment funds. With over 80% of capital going to deals valued at over $50m, capital allocators are betting big on venture-backed growth companies. Consequently, it is no surprise that more unicorns were minted in the US than any other previous year as shown below.
2022 is the year of venture capital. All of the factors discussed above have culminated in the maturation of VC ecosystems in countries such as the US, leading to a prosperous asset class that continually produces highly valued, cash-generating companies. VC Lab is powering a renaissance of new fund managers across the globe by making the necessary information, expertise, and resources more widely available. The increasing rate of venture-backed unicorns worldwide is fuelling and nurturing new ecosystems, creating a cycle of innovation and growth.
VC Lab runs Genesis, the four-month accelerator for venture capital firms and venture builders.
Cohort 6 starts in February and will help participants from around the world close on capital and start investing by June of 2022.
Learn more and apply here