When the bet capitalist Aileen Lee invented the term Unicorn, in 2013 there were 39 of them – about four minted each year. So far in 2021, 264 companies in the United States have reached such valuations. All over the world, more startups are turning into unicorns every single day.
The staggering rate at which companies reach valuations of billions of dollars is just one of the ways in which venture capital has burst charts this year. “We’re looking at $ 240 billion invested in VC-backed companies this year, which would have seemed outrageous a few years ago,” said Kyle Stanford, senior analyst at Pitchbook. “There’s more capital and more interest in the venture space than there has ever been.”
Between July and September, more than $ 82 billion came to U.S. startups, according to a new report on Q3 data from Pitchbook and the National Venture Capital Association. That’s about as much as venture capitalists spent throughout 2017 — which at the time was the high-water mark for venture capital spending since the dotcom boom of the early 2000s. Globally, Crunchbase found that the Q3 total was $ 160 billion, a new record high for any quarter in history. Trade sizes have also increased: The average early agreement in the US is now $ 20 million.
This money flows into every part of the startup world, from angel investments to late stages, from business software to financial technology. More interest comes from what Pitchbook calls “untraditional” investors: those in private equity, hedge funds or companies that have deeper pockets than the average fund on Sand Hill Road. These investors have put their elbows into venture capital to try to make a piece of the excellent profits. Across the market, the exit value — the amount a business is worth when first published or acquired — is at an all-time high, exceeding $ 500 billion for the first time in a single year (with a quarter of an hour left). That is already double the record from last year.
Investors, of course, chase all the jackpot at the end of the rainbow. “Everyone is going to venture out, because it’s been one of the most effective asset classes in the last couple of years,” Stanford said. In the past year, a number of companies have been published with valuations of $ 10 billion or higher, including Coinbase, UiPath and Toast.
These huge returns for investors have amplified the VC cycle, says David Hsu, a venture capital researcher at the University of Pennsylvania’s Wharton School of Business. Investors see large outputs that “nurture the VC appetite to invest in tomorrow’s start-up.” Hsu also noted that new avenues for liquidity, including SPACs, have enabled more startups to go public quickly.
Hsu believes that emerging technologies, such as blockchain and AI, have led to a number of new start-up innovations. “Other companies have benefited from the Covid economy, such as some areas of e-commerce and supplies,” he says. While these startups may be receiving more attention than ever from VCs, Hsu warns that the durability of their business models remains to be seen.
Others are even less optimistic. “It’s very frothy out there. People are just throwing money around, ”says Carey Smith, founder of Unorthodox Ventures, an investment firm in Austin. Smith disagrees that the current VC bonanza is driven by start-up innovation, which he believes has remained more or less flat over time. “I would guess that not even 1 percent of today’s startups are viable businesses,” he says. Smith says that while VCs expect many of their investments to be duds, founders can get screwed in the process. Raising a ton of capital to an inflated valuation entails its own risks: If you do not live up to that standard, future investors may re-evaluate your business downward and dilute your equity.