The venture capital industry’s comeback from fear in Q1 and parts of Q2 to Q3 greed is worth understanding. To get our hands around what happened to private capital in 2020, we’ve taken looks into both the United States’ VC scene and the global picture this week.
Catching you up, there was lots of private money available for startups in the third quarter, with the money tilting toward later-stage rounds.
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Late-stage rounds are bigger than early-stage rounds, so they take up more dollars individually. But Q3 2020 was a standout period for how high late-stage money stacked up compared to cash available to younger startups.
For example, according to CB Insights data, 54% of all venture capital money invested in the United States in the third quarter was part of rounds that were $100 million or more. That worked out to 88 rounds — a historical record — worth $19.8 billion.
The other 1,373 venture capital deals in the United States during Q3 had to split the remaining 46% of the money.
While the broader domestic and global venture capital scenes showed signs of life — dollars invested in Europe and Asia rose, American seed deal volume perked back up, that sort of thing — it’s the late-stage data that I can’t shake.
To my non-American friends, the data we have available is focused on the United States, so we’ll have to examine the late-stage dollar boom through a domestic lens. The general points should apply broadly, and we’ll always do our best to keep our perspective broad.
A late-stage takeover
Back to our topic, PitchBook data concerning Q3 helps explains how VC deals managed to favor the later-stages of startup life.
A few examples makes our case: The percent of VC deals in the U.S. during Q3 2020 that were worth $25 million or more rose to over 18%, a record going back to at least 2015. PitchBook notes that “more than 30.5% of late-stage VC deals are over $25 million and drive 75.5% of the total value at the stage.” The data company defines late-stage VC as Series C and beyond.
As startups accelerate in record Q3, Europe and Asia rack up huge VC results
The same dataset notes that late-stage VC is set to break records in 2020, with the year’s first three quarters’ tally of late-stage monies for U.S.-based startups nearly equalling 2019’s result, the second best on record.
(Notably the same trends are impacting female-founded startups. According to the same Q3 report, late-stage rounds have taken up a consistently larger portion of total female-founded deal volume in the United States since 2013, when those rounds appeared to constitute around 10% of total volume. In 2020 thus far, that number is around twice as large, and the strongest performance of late-stage rounds as a percent of domestic venture capital deals since at least 2010. That’s good news for women building startups.)
We’re seeing money tip more heavily toward the largest rounds, and late-stage money more generally constitutes a rising portion of deal volume in the United States venture capital scene.
Why, is a good question. Unicorns, at least partially. As the number of unexited-unicorns rises, the amount of money that the herd consumes naturally rises. Unicorns are nearly never profitable, and some are incredibly deep into the red. So, holding all other things equal, the more unicorns that are in the market, the more total capital they will require.
Multiplying unicorns
And the number of unicorns is growing. As we reported earlier in the week, despite the huge wave of unicorn liquidity in Q3 2020, the number of unexited unicorns in the United States still rose by two from 214 in Q2 2020 to 216 in Q3 2020, according to CB Insights. That despite 17 startups reaching unicorn status. So, the U.S. market nearly managed to exit enough unicorns in Q3 to cull its total domestic population, but not quite.
With 216 unicorns in the United States and hundreds more around the globe, is it any surprise that so much venture capital is going to their feeding?
Dozy unicorns who refuse to leave the home paddock are eating all the damn money! Or more than half of it, at least.
It is not impossible to understand why investors are willing to keep paying up to support the unicorn population. The same report that included the unicorn count data notes that the value of unicorns in the United States rose to $646 billion in the third quarter, from just $593 billion in the first quarter.
You can’t let those companies die. So, they keep raising.
Gold linings
But don’t take this as all bad news. The impact of so much of the venture capital industry operating as a care home for Peter Pan unicorns is that exits have risen dramatically in size. According to PitchBook data, the percent of American VC-backed private company exits that are at least worth $100 million have grown from around 40% in 2010 to perhaps 65% (the chart in question lacks per-column data points, so we’re measuring with our eyes).
At the same time, the percent of American VC-backed private company exits worth $500 million has exploded from under 10% of the total in 2010 to more than 20% in 2020. The result of exits worth half a billion dollars or more rising as percent of exit volume is that, in dollar terms, the exit market has become a late-stage-only game. Exits of $500 million or more constitute over 80% of the dollar volume of 2020 VC-backed private company exits, per PitchBook. Throw in exits of $100 million and up and we’ve counted nearly every exit dollar.
Small exits of VC-backed companies, at least in the United States, have given way to the unicorn era.
So the story of how venture capital tilted later-stage, and larger, is a unicorn story. But the same tale contains a second narrative of rising exit sizes. And it closes with a cliffhanger: What happens to all the unicorns when the late-stage money market gets worse at some point in the future?
Late-stage deals made Q3 2020 a standout VC quarter for US-based startups
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