Hedge Funds, Family Offices Fuel Surge in Mega VC Deals

Nontraditional venture capital investors are buoying mega-rounds, keeping dealmaking near record levels last year, according to a new PitchBook report.

Illustration by II

Illustration by II

Venture capital activity remained near record levels last year, as nontraditional investors such as hedge funds, family offices, and sovereign wealth funds fueled a rise in mega deals.

U.S. companies attracted $136.5 billion of VC investment in 2019, down just 2.6 percent from the unprecedented surge in deal value seen the year before, according to a report expected to be released Tuesday by PitchBook and the National Venture Capital Association. The number of deals rose by about 2.2 percent, with those in the mega-range of more than $100 million jumping to a new peak.

Nontraditional investors participated in more than 85 percent of mega-deals in 2019, according to the report. This source of capital is needed to sustain the elevated level of “outsized” venture deals over the past two years, PitchBook and NVCA said.

“2019 showed that industry trends from the historic 2018 are the new normal for the venture industry, with mega-rounds and mega-funds becoming increasingly common trends in the startup ecosystem,” Bobby Franklin, NVCA’s president and chief executive officer, said in a statement on the report. “The robust fundraising environment and large amounts of dry powder available at many venture firms should allow the industry to sustain this new level of investment activity in 2020.”

While U.S. venture capital fundraising fell 20 percent last year to $46.3 billion, the report shows the total is still the second highest level of capital pooled in the past decade. The newly raised funds, along with nontraditional VC investors attracted to the industry’s “substantial cash flows,” should keep deal activity elevated, according to PitchBook.

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Venture capital funds are larger than ever, with the median investment pool rising to $78.5 million last year, according to the report. The biggest venture pool of 2019 was TCV’s $3.2 billion fund targeting deals in IT infrastructure and consumer internet companies, according to the report.

While the number of mega funds — those with more than $500 million of capital — raised last year fell short of 2018’s total, PitchBook and NVCA characterized the activity as strong. Such large funds help companies take a “blitzscaling” approach to gaining market share by investing in giant funding rounds that drive rapid growth.

Startups are staying private longer, raising “IPO-sized funding” from a variety of investors, according to the report. Some firms that focus on early-stage deals have responded by raising larger funds that shift their focus to later stages of the funding lifecycle for companies or by raising funds that provide follow-on capital for companies they already own, PitchBook and NCVA said.

For example, the report cited Peter Thiel’s Founders Fund, which traditionally seeds technology startups or invests in them during their early stages, but recently moved to raise a $1.5 billion pool for growth-stage startups. While the shift doesn’t mark a larger trend, it shows that “perpetual fundraises” will probably prompt some VCs to “rethink their investment strategies,” according to PitchBook and NCVA.