Somehow the third quarter of 2021 is coming to a close. Instead of a period filled with family and friends and fun, in many parts of the world, the COVID era dragged on, leaving us largely working from home and executing more phone calls than impromptu brunches. Alas.
But in the last handful of quarters, COVID and its impacts have proven to be attractive periods for both startup fundraising and growth. The second quarter, for example, saw huge sums of private capital disbursed around the world, partially predicated on underlying performance from startups themselves, and partially thanks to inexpensive capital bolstering venture coffers.
The Exchange explores startups, markets and money.
Read it every morning on Extra Crunch or get The Exchange newsletter every Saturday.
Now, with the third quarter wrapping up, The Exchange is prepping for a lengthy dive into global venture capital results. To kick that off, today we’re asking a series of questions: We want to understand how strong Europe’s third quarter was and if the region can match its prior — stellar — fundraising results. We’re interested in what’s going on with China’s venture capital market in the wake of a host of regulatory changes.
We also want to know if the United States is holding onto its position as the leading global venture capital market, and where in the country capital is flowing the most freely. And we want to know where in Latin America we’re seeing the most fundraising acceleration, along with just how important mega-rounds are to recent, aggregate global totals; are big deals still setting the tone for global venture totals?
Today we’ll explore each question in brief, ahead of what we presume will be a long, multipart dive into the data once Q3 comes to a close later this week.
Did Europe’s venture scene keep raising record sums?
Our first question for Europe will be whether it managed to match its impressive Q2 results. There are signs that it may have, as France recently celebrated the slightly random but no less significant milestone of “1 billion euros raised in one day.” Our suspicion is that these deals were actually announced in close succession because none of the involved startups wanted to miss out on the spotlight after raising record amounts — $555 million for marketplace platform Mirakl, $680 million for fantasy sports startup Sorare and $209 million for Vestiaire Collective.
As a follow-on, we’ll likely look into whether this has anything to do with Brexit: Is capital simply redirecting out of the U.K.? Our intuition is that it isn’t, since we are still hearing about a lot of activity in London and beyond. But capital that might have kept flowing in that direction could now be going to other places in Europe — so we’ll take a closer look at how widely distributed it is, and also at what’s going on with Euronext in terms of tech IPOs.
What’s going on with China’s venture capital market?
Recent regulatory shifts have remade China’s technology landscape. Tech giants have been brought to heel, and rule changes to edtech, social media, gaming and other varietals have shaken both tech companies and other industries in the country. Despite all that, it isn’t hard to find commentary discussing the possible positive impact on China’s economy thanks to the new set of rules.
China’s expected edtech clampdown may chill a key startup sector
For example, while some of China’s government’s dictates are almost funny, like its crackdown on celebrity fan culture, others are less inane. A move to relax the iron grip that some incumbent tech companies had on one particular market or another could in fact make for a more competitive environment, one that may prove winsome for startups.
But major Chinese tech companies have also proven to be investing powerhouses in their own right, so precisely how Chinese market investment totals will shake out in Q3 is not clear. There is some reporting indicating that money is skipping China to flow to India instead, for example. Naturally, the Indian market will be part of our larger analysis.
A quick and dirty dig into PitchBook data doesn’t appear to indicate much of a slowdown, with Q3 totals for venture capital-backed startups coming in roughly in line with Q2 results from the same data set. However, we’ll want to get more nuanced numbers before we state anything definitive. And, given how laggy venture capital data can be, it may be that we won’t see the real impact of regulatory changes on venture flows in China until the fourth quarter of 2021.
Is the U.S. holding onto, or losing, venture dominance?
Briefly, at different points in time, the United States’ venture capital market has lost some of its comparative luster. China in the middle unicorn era, for example, matched venture totals from the United States. That wound up being a short-term phenomenon, but the moment has stayed in our memory.
The Exchange does not anticipate that any single market will come close to the United States’ domestic venture capital totals in Q3, but we are curious about relative shares; which markets are gaining in relative terms compared to the United States when we consider complete global data?
And, among that cohort, which markets are growing the most rapidly? Startups are hardly a domestic game; this is a global race and we want to know which runners are picking up the pace most quickly when compared to the current leader.
Where in Latin America are we seeing the most acceleration?
In Latin America, both Brazil and Mexico had a record second quarter while still capturing the lion’s share of venture capital flowing into the region. What we’d like to confirm is whether that held up during the next three months and/or whether there are signs that things could change in the near future.
From reading TechCrunch, we already know that there were plenty of mega-rounds in both Brazil and Mexico over the last few weeks. We also know that there are more to come, as SoftBank’s activity in the region has been ramping up: “By the end of 2021, we’re going to have deployed $8 billion in Latin America. This year alone, we’re deploying $5 billion, and the last two years we deployed a combined $3 billion,” SoftBank Group CEO Marcelo Claure explained during Disrupt. His expectation for 2022? That “SoftBank will deploy between $8 billion to $10 billion of capital into Latin America.”
With that in mind, we’ll check the weight of mega-rounds in Q3’s totals, and we’ll also confirm whether Brazil and Mexico are still receiving the most funding. Indeed, a new acronym came up on our radar this quarter: CAPUC. It stands for Chile, Argentina, Peru, Uruguay and Colombia. We first heard it from Hernan Haro, a GP at MrPink VC, which is precisely dedicated to investing in startups with founders from these five countries and with a strong presence in Latin America.
If this is happening, could this be a sign that more investors are looking beyond Brazil and Mexico? And if they do, is it partly because of the political situation in these countries? In Brazil, we read that uncertainty around President Jair Bolsonaro is reportedly starting to affect the IPO opportunities that had opened up for local startups on São Paulo’s B3 stock exchange, and this is definitely something that we’ll be watching out for.
Are mega-rounds still the key driver in venture aggregates?
Finally, how critical are mega-rounds in Q3 venture totals, measured in how much of the global VC market they constitute? In recent years, investments worth $100 million or more have provided a large portion of total venture dollar volume. These rounds, while infrequent compared to seed investments, to pick an extreme example, can make individual markets appear healthier than they might actually be.
An example will make that point plain. Let’s say that a country sees its early-stage deal volume dip and dollars flowing to smaller startups decelerate in a single quarter. But, during the same period, a handful of mega-deals are completed by the more mature startups from the locale. The latter few rounds could make the country’s total results appear strong, despite there being some rot in the wood.
We’re curious about how strong mega-rounds prove in the third quarter, and whether their share of total dollar and deal volume indicates that they are the whipped cream at the peak of a healthy venture market or more an insalubrious pile atop a declining earlier-stage sheaf of deals.
Comment