This Year on Pace to Beat 2020’s Record Year for VC Investment

A Quarterly Wink and a Glance at Venture Capital

Last year was a record year for VC investment, with $156 billion invested in more than 12,200 deals. However, based on Q1 2021 VC activity, it appears—for the moment—that the record will be shattered in 2021. In Q1 2021, VCs deployed $69 billion across approximately 4,000 deals. In fact, Q1 2021 investment exceeded the full-year VC investment in 2011, 2012 and 2013. The technology and life sciences sectors continue to attract the most VC dollars. Covid-19 has certainly created new interest in the vaccine space and resulted in $10.5 billion invested in life sciences deals in Q1. On the other hand, the technology sector saw $57 billion invested in Q1, which is that sector’s highest quarter on record.

Deal Sizes on the Rise

It certainly looks like the average deal size in every category was higher in Q1 2021 than in Q1 2020. In Q1 of this year, the average deal size climbed to: angel ($624K), seed ($2.6 million), early-stage ($20.4 million), and late-stage ($40.2 million), respectively. This increase in deal size should not come as a surprise, as VCs continue to compete for good deals and efficient capital deployment.

Mega Deals Still Driving the Market

In Q1 of 2021, 167 mega deals (deals greater than $100 million) were completed totaling $41.7 billion. Put another way, more than 60% of the VC dollars invested in Q1 were invested in mega deals. In all of 2020, there were 336 mega deals totaling $76.6 million. Last year was a record year for mega deals, and if 2021 performance continues at this pace, that record could be exceeded by the end of Q2. The mega deal has certainly taken VCs by storm. Many of the companies that raised mega rounds in Q1 could be positioning themselves for a public listing later in 2021 or early 2022.

VC Exits Remain Frothy

Q1 saw 447 VC-backed exits totaling $118.1 billion, which included a single direct listing (Roblox) that generated $41.9 billion. Last year was a record year for VC-backed exits, with more than $300 billion, and given the Q1 performance that record is certainly in sight. The big unknown regarding VC exits probably has to do with SPACs. SPACs raised $83 billion in Q1, which already exceeds the amount that SPACs raised in all of 2020. With all of this new capital, SPAC acquisition activity should continue at a fairly robust level for the remainder of the year. In fact, SPACs accounted for 75% of all IPOs in Q1. However, this could all change if the regulatory scrutiny surrounding SPACs and their investment returns have a negative impact on this acquisition vehicle.

2021 Fundraising on Track to Break a Record

In Q1, VC funds raised $32.7 billion in 141 funds. The VC industry has never seen fundraising exceed $100 billion in a single year, but that could certainly change in 2021. We are not only seeing the continuing proliferation of the mega deal, but now mega funds ($500 million plus) are now becoming more common. In Q1, mega funds accounted for almost 45% of all capital raised. In Q1 alone, 13 mega funds were raised. These mega funds have now pushed the median VC fund size to $80 million and the average VC fund size to $235.2 million. Larger funds are certainly going to have to look at larger deal sizes in order to continue to deploy this capital.

Outlook

The overall health of the VC market seems good and shows little effects from the pandemic. After a record year in 2020, the VC market has not lost any of it momentum in 2021. With significant stimulus dollars injected into the economy, it is starting to show signs of recovery, and with more of the population getting vaccinated there should be no reason for the VC market to wane in 2021. It will be interesting over the next couple of quarters to see if investors continue to put capital into SPACs, how SPACs will influence VC exits, and what VC records are broken this year.