Venture Capital Shifts Gears

Venture capital is moving away from unicorns and towards mature companies.

The venture capital industry saw historic numbers in 2021. The US venture capital industry invested $329.9 billion last year, about double the deal value of 2020, according to Pitchbook, a venture capital database.

Other regions have experienced similar trends, with Europe showing more than $110 billion in venture capital investments in 2021, 18% of the global venture industry. Consequently, venture investing became a critical component of private funds, institutional investors and family offices’ alternative investment portfolios.

In recent years, the boom in the venture sector has disproportionally increased venture investments in seed and early rounds. Increasing multiples and higher valuation for tech companies in private and public markets encouraged venture investors to get exposure to early investing, resulting in them dominating seed rounds.

Yet, the decline in public markets, valuations of private tech companies and the more limited exit options forced venture funds to reassess their investment strategy and the kind of companies they invest in, with a more significant focus on more advanced companies pre-IPO. Venture financing globally in the second quarter of 2021 declined 30% to $120 billion from the first quarter, according to a KPMG report, significantly impacting early-stage funds and companies. The US, the largest venture investing market, saw a decline of 24% in the second quarter from the previous one. Early-stage funding to European startups in the second quarter of 2022 fell by 9% year-over-year, according to Crunchbase.

The trend, in fact, had already started in 2021, when investments in mature companies doubled compared to the 2020 investment record, according to Pitchbook. Among the notable late-stage investments globally in 2022 are SpaceX, an aerospace company that raised $1.7 billion, and Epic Games, an entertainment software company that raised $2 billion despite the challenging macroeconomic environment.

Other venture jurisdictions experienced similar dynamics, where total venture investments declined but investments in late-stage companies stayed strong. In the UK, for example, SumUp, a financial technology firm that enables credit payments for small businesses, has raised around $626 million—a major round, considering the substantial decline in appetite for investing in early fintech companies in 2022.