Are We In A Venture Capital Bubble?

The most alarming developments in venture capital are here to stay for five reasons.
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This is a prevalent narrative for everyone working in venture capital in 2021. The market, according to Nate Williams, co-founder and General Partner of startup fund Union Labs, is, “GET UP AND GO! Most diligence cycles were compressing into weeks in 2020, but we’ve recently seen some fundraises come together in days, often before their official’starts.'” A fast-paced and competitive funding environment, along with a growing stock market and ever-increasing valuations at every stage, has many people questioning “Is this a blip on the radar? How long do you think it’ll last?”
COVID was anything from a cooling mechanism on capital markets, despite senior investors warned of a coming “winter” in 2019. In fact, the opposite was true. In early 2021, public markets and technology multiples both set new highs. In the first quarter of this year, 50 venture-backed businesses went public, which is five times the historical average. Early stage pre-money valuations have nearly risen from $60 million in 2020 to $110 million in 2021, according to Pitchbook-NVCA data. Late-stage prices have increased even more drastically, roughly quadrupling to $1.6 billion on average.
Though shocking on a daily basis, the current pace is expected to continue in the absence of widespread fraud or a huge fall in public markets, and here’s why:
The promise of quick expansion is used to determine the value of a company. In reality, because to the acceleration of fundamental trends toward cloud-based solutions, automation, and the future of work, businesses are growing faster than ever before. According to Bessemer’s State of the Cloud report, twenty years ago, scaling a subscription business to $100 million ARR took ten years or more. Companies like UIPath and Slack, for example, are getting there in a couple of years. The speed with which companies are growing is reflected in their valuations. A unicorn was an uncommon breed in 2013, but by 2021, a new unicorn has been minted every day.

Report on the State of the Cloud in 2020 by BVP
Bessemer Venture Partners is a venture capital firm based in Bessemer
ADDITIONAL INFORMATION FOR YOU “Private IT firms are bigger and older than they’ve ever been. It’s more of a reallocation of public resources to private enterprises, rather than a bubble “Marcelino Pantoja, a startup founder who previously worked at Stanford University’s investment office and most recently at Tribe Capital, emphasized this point. According to Morgan Stanley, growing IPO expenses, improved access to private financing, and lower infrastructure costs for scaling have pushed companies to stay private for longer, resulting in a 50 percent increase in the typical age of a company going public since 2001.
According to a recent research by JPMorgan Asset Management’s Michael Cembalest, median 10-year annualized returns in venture capital are higher than those in buyout, real estate, and private credit funds. Blockbuster returns from recent liquidity events, low interest rates, and policy tailwinds have only added to the appeal of venture capital as an asset class, hastening the shift of capital from public to private markets and encouraging both traditional and non-traditional private equity investors to increase their allocations to venture capital funds.
Traditional market investors, such as asset managers and hedge funds, often oversee billions of dollars in assets and are looking for larger and larger investment vehicles through which to put significant cash into venture capital. As a result, approximately half of all new venture money is managed through funds greater than $1 billion. Fund managers earn the majority of their income from carried interest, which is earned only after the fund has been returned, thus they are enticed to write larger and larger checks in the hopes of returning the fund from a single good investment. Unless valuations improve by a same amount, bigger checks indicate higher dilution for founders.
The rise in valuations is logically explained by supply and demand dynamics, as investor desire for alternative private investments has expanded but supply of venture-scale enterprises has remained stable. “Because the big multistage funds are striving to move ahead of the competition, subsequent rounds are taking place over a shorter period of time. I’ve seen Series B investors contact out to founders just days after their Series A is announced “Forum Ventures’ Michael Cardamone says (formerly known as Acceleprise). This supply/demand imbalance is likely to persist without a large reduction in beginning costs, such as the introduction of cloud-based infrastructure like AWS ten years ago, which removed significant hurdles to establishing a firm and thus led to a surge in supply of VC-backed businesses.

The number of VC-backed businesses has remained constant.
Pitchbook-NVCA

Investing in early-stage firms is a trip full of forks, and navigating the new venture capital landscape demands a delicate balance of strategic adaptation and discipline. Many early-stage executives, like as Williams at Union Labs, are becoming more specialized and focused on building networks that will provide them with a long-term competitive advantage. “We’ve always been laser-focused on a single goal. We’ve been creating broad investor networks across Series A/B companies, Corporate VCs, and other independent angel investors in our deep tech emphasis areas “Williams agrees.
Later-stage investors are boosting fund amounts and establishing seed programs, incubators, and other tools to form long-term connections with entrepreneurs before making a large investment. Pre-seed accelerators have been founded by entrepreneurs like Cardamone. “We analyze hundreds of firms each year and invest in 50-60 pre-seed SaaS companies each year, so we’ve had to build out the processes and infrastructure to review a huge volume of companies quickly,” he explained. “In this industry, this allows us to be very adaptable when we come across a firm we like but the round is moving quickly.”
Although headlines suggest that diligence timelines have been shortened, many of the rounds that are being completed today are the result of months of relationship building, market watch, and constant backchannel references. A circle that comes together fast is the result of many minor tasks completed over a lengthy period of time.
Venture capital has never been more fascinating or frantic, and the asset class remains one of the most promising available to investors today. Only time will tell whether this is a true asset bubble, but for the time being, existing patterns are expected to continue./nRead More