A Record Year for Venture Capital
February 15, 2022
Managing Director of EisnerAmper’s Capital Markets Alan Wink talks about a record year for venture capital activity, puts a bow on Q4, and gives us his thoughts on what we can expect from VC investment in 2022.
DP: Likewise. So a lot of activity in 2021. Give us a recap of Q4.
AW: 2021 was just an absolutely spectacular year in venture capital across the board. And I'll give you some facts and figures. But I think the one thing you have to keep in mind, this happened during COVID. Besides COVID, the backdrop of COVID, the backdrop of a global employee shortage, a backdrop with the chip shortage in the semiconductor space, these numbers are just outstanding. If you look at 2021, we saw 329 billion dollars invested in the venture capital space here in the United States. That exceeded the prior record. The prior record was 166 billion, which was achieved in 2020, which was part of the COVID year. We doubled the record last year.
Also, there were records set in terms of exit value of VC-backed deals. There was records set in terms of capital raised. It was the first year, ever in history, that the venture capital industry raised over a hundred billion dollars. It was just a spectacular year. I mean, the venture capital asset class is showing returns much better than any other asset class at this point in time. The question is, will it continue into the future? And we could certainly talk about that later.
DP:Yeah. If you could, put the fourth quarter kind of in the context of the entire year.
AW: Similar, I think there's 90 billion of venture capital invested on a 330 billion dollar base for the year. It certainly was in line with prior quarters in 2021. And far better than in comparable quarters in 2020. There's just still so much capital sitting on the sidelines. I read figures that there's probably 900 billion dollars of venture capital waiting to be invested.
DP:Now, you said something interesting earlier. We're sitting here doing this on our computers. We have our smartphones next to us. We have our smart appliances and our smart cars, but you mentioned the global chip shortage. I'm not sure if this is really being widely reported. Tell us about that.
AW:Well, it's impacted every industry. You look at Apple stock and it took a decline earlier in the year when Tim Cook announced they were having problems in their supply chain, getting chips for their phones. You look at a stock like Tesla. It's done extremely well, because they had their own supply of chips and they were able to keep producing cars. The chip shortage is real. It's not going away. It's going to be with us in 2022 and 2023, until these factories can come back online and continue producing at the level that's necessary, where you're going to have more chip producers being formed here in the United States to amp up our production. It has to happen, because there certainly is a global shortage of chips and it's impacting many, many industries around the world.
DP:Is it a raw material shortage or is it a supply chain issue?
AW:It's a supply chain issue. Well, it's both. There is certainly a shortage of the components that go into chips. And you have issues with manufacturing facilities and getting people. It's across the board. I mean, it's certainly an issue that's got to be addressed.
DP:Okay. So turning the page a little bit, let's look ahead to 2022. Are we still going to be in the Roaring Twenties? What does your crystal ball say for VC investment?
AW: Well, I think there's probably two sides of the coin. I have to admit. I think when you look at the amount of capital that's waiting to be invested, you look at the success of the venture capital asset class and the returns they've achieved in recent years, there probably is a reason to be bullish on the market going forward. But there is some headwinds. Last year, 296 tech companies went public. Almost 300 tech companies went public, either through an IPO or through a SPAC. As of two days ago, almost 40% of those public companies, their shares were trading at a price below the IPO price. And if you look at the numbers, companies that went public with revenues less than 10 million dollars, they're down almost 42% from their IPO price. It's about 28% for companies that had revenues in excess of 10 million dollars.
So you look at that and maybe the valuations were a little bit out of whack. So I think there's going to be some correction in terms of VC-backed company valuations. And I think that we're certainly going to see that in the next year or two. You have to remember that activity was at record levels. So VCs were doing deals much faster than they were in the past. And at prices that were much higher in terms of valuations than they've done in the past. And maybe there's going to be some corrections and the VCs are going to start looking at deals at more modest valuations. But once again, you have the supply and demand issue here and there is certainly a great demand for that capital and there's a great supply of capital. So will you see some level of correction in 2022? I believe so. But I still think it's going to be a very good year again, maybe not at the level of 2021, but I think it'll be a good year.
DP:So for 2022, what about SPACs? Are they still going to be the hot commodity? Or are they going to cool down a little bit? What are your thoughts there?
AW: No. You saw them starting to cool down towards the end of 2021. Capital has been given back to investors. I think you'll continue to see that again in the future. I think a lot of companies went public through SPACs that maybe should not have. And you're probably seeing that. I mentioned that companies with revenues less than 10 million that went public had such a large decline in their share price versus their IPO price. So apparently, a lot of people who invested in them aren't doing as well as they would've liked.
DP:Okay. Any other final thoughts on Q4 or 2021?
AW:No, as I said, a tremendous year. And I think we're all going to be waiting to see what the results are for the first quarter to see if that continues into the future.
DP: Well, Alan, thanks for your expertise and your insight.
AW: Dave, thank you so much for your questions. And I look forward to talking to you at the end of Q1.
DP: And thank you for listening to EisnerAmper's Podcast Series. Visit EisnerAmper.com for more information on this and a host of other topics. And join us for our next podcast when we get down to business.
Transcribed by Rev.com