Despite Adversities, 2021 Was a Record Year for VC

A Quarterly Wink and a Glance at Venture Capital

The fourth quarter of 2021 concluded a record-setting year for venture capital, recording more than $90 billion of VC investment across 4,200-plus deals. VC investment for all of 2021 ($329.6 billion) not only exceeded the prior record, which was established in 2020 ($166.6 billion), it nearly doubled it. Total 2021 deal count of 17,054 also set a record, far exceeding the prior record of 12,490 deals done in 2019. It was also a record-setting year in 2021 in several other categories: dollars and deal totals for seed, angel, early- and late-stage companies; exit values by VC-backed companies; VC investments by nontraditional investors such as PE funds, hedge funds and corporate VCs; and VC fundraising. Let's not forget that these records all occurred during a pandemic, global chip shortage and labor contraction—among other things. At this writing, U.S. manufacturers are down to less than five days of inventory for key chips, compared to 40 days of inventory for key chips prior to the pandemic.

Public Markets Continue to Drive VC Exits

A total of 88% of VC-backed exit activity in 2021 was achieved through the public markets. There was $774.1 billion in VC- backed exit activity in 2021, and this crushed the previous record of $289 billion achieved in 2020. The $774.1 billion of exit value included $681.5 billion that was the direct result of IPOs and SPACs. There were 296 public listings of VC-backed companies during 2021.

Nontraditional VC Investors Playing a Bigger Role

In 2021, nontraditional VC investors (e.g., private equity firms, hedge funds, corporate VC groups and sovereign wealth funds) invested in almost 6,500 deals and produced more than $253 billion of deal value. These nontraditional investors especially embraced the VC mega deals (deals over $100 million). In 2021, there were over 800 mega deals closed, which was more that the total closed in 2018, 2019 and 2020 combined. Of the 800-plus mega deals closed in 2021, more than 700 of those deals received capital from nontraditional VC investors. These nontraditional VC investors were influenced by VC returns, which have been the highest performing private asset class over the past couple of years.

Angel and Seed Stage Deals Are the New Series A

In 2021, angel and seed stage deals accounted for 6,649 transactions totaling $17 billion. In 2011, angel and seed only accounted for approximately 2,600 deals and $2.4 billion of investment. Angel and seed investors have certainly been active participants in the VC ecosystem. In fact, during 2021, a few large VC funds even raised smaller funds specifically targeted to the seed stage. A total of $13.1 billion was invested in seed stage deals in 2021, which is about the same amount invested in early-stage deals a decade ago.

A Record Year for Early-Stage VC in 2021

We saw early-stage VC investment exceed $80 billion in 2021—the first time this has ever happened. Furthermore, early-stage deal activity totaled $84.3 billion across 5,300 deals. This was also the first year that early-stage deal counts exceeded 5,000 deals. Founders continue to see increases in deal sizes and valuations, with records achieved in 2021 for both median deal size of $10 million and pre-money valuation of $46 million.

Capital Is Not Close to Drying Up

VC firms raised a record $128.3 billion across 730 funds in 2021. This was the first year that fundraising has ever exceeded $100 billion. The median and average fundraising values were $50 million and $188 million, respectively—significantly higher than the average value of $42 million and the average value of $157 million in 2020. With the venture capital asset class continuing to show stellar returns and VCs returning capital to LPS, VCs should continue to raise new funds with relative ease.

Outlook

With many obstacles to overcome, including COVID-19 as well as supply and labor shortages, the performance of the VC industry in 2021 was nothing short of spectacular. VC continues to outperform all other private capital asset classes and, as a result, I see no reason why LPs will stop investing capital in the VC asset class. With record amounts of dry powder waiting on the sidelines, entrepreneurs continuing to build innovative companies and a vibrant IPO market, I don’t see the VC machine slowing down in 2021. We’ll get some inkling of this year’s trajectory with Q1 2022 and see if we’re on track to set some new records.