Global venture capital had a banner 2018, as recently released data shows:
- Over $300 billion invested across all parts of the VC life cycle, from seed rounds to late stage deals. That is +55% higher than 2017 and a record back to the 1990s dot com boom.
- For the first time ever, “supergiant” deals (over $100 million) were more than half the total deal flow at 57% for the year.
- The fourth quarter of 2018 saw 61% of capital invested going to supergiant deals as well as an all-time record for total dollars invested.
- Total global deal volume in 2018 came in at just over 34,000 transactions, up 33% from last year and running at a 12% CAGR over the last 5 years.
- You can read a complete analysis (and the source for this data) in the following Techcrunch article: https://news.crunchbase.com/news/q4-2018-closes-out-a-record-year-for-the-global-vc-market/
As for whether this tidal wave of VC money is good or bad for public equity investors, we’ll break it down this way:
Good news (2 points):
- Despite 2018’s stock market volatility, VCs kept their checkbooks open and active. They could have pulled in their horns after Q1’s churn, but instead they plowed a record amount of capital into a record number of investments.
- Today’s VC investment can be tomorrow’s initial public offering and (eventually) the next Google, Facebook or Amazon. Yes, VCs are keeping their portfolio companies private longer than ever before but eventually they will have to exit. And some of their investments will end up helping US stock returns once they IPO, just as disruptive Tech companies have powered gains over the last decade.
Neutral (1 point):
- All these disruptive companies will either end up competing/upending public companies or purchased by them.
Remember that the first page of every startup’s pitch book is an addressable market – a large pool of potential profit already occupied by an existing company. Venture capital provides the financial resources to take that away. To maintain their competitive position, public companies will either purchase the startup or spend incrementally to defend their existing model.
Bad news (2 points):
- Deal volume and count notwithstanding, venture capital’s fixation with supergiant rounds looks like de-risking. Better to fund a well-established startup with a truckload of fresh capital than the uncertainty of a smaller business with fewer resources if you are worried about the business/capital markets cycle.
- Last year’s record levels will bring the inevitable comparison to prior market tops like 1999.
Our take on all this: we are not especially concerned that 2018’s record levels of venture capital funding is a sign of a top, but that’s not all good news for equity markets.
Venture capital is seeing secular growth because asset owners have experienced subpar public equity returns for decades and low interest rates don’t offer much opportunity in fixed income. The S&P 500 has only compounded at 5.5% over the last 20 years, after all, and Treasuries pay less than 3%. To generate better returns, capital must travel to higher risk destinations like venture capital. And even if 2019 sees slowing global growth or recession, that trend is unlikely to change.