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Investors Lean Into Early-Stage Venture Capital Deals in Pandemic Recovery

The first quarter was marked by record activity from non-traditional investors like mutual funds, hedge funds, and private equity.

Venture capital is back, better, and younger than ever. 

Start-ups that survived the pandemic are raising venture financing rounds at valuations well above the period before the coronavirus shut down global economies. At the same time, investors are increasingly placing capital in early-stage deals, according to a new PitchBook report. 

Although there's a bump in interest in younger companies, venture capital activity is strong for deals in all stages. According to the report, both early- and late-stage venture capital deals experienced growth in pre-money valuations – the value before companies go public or get other kinds of financing. The median and average pre-money valuations for early stage companies hit $40 million and $96.3 million, respectively, in the first quarter. Both are records. For later stage companies, a number of huge deals increased the median and average pre-money valuations to $122.5 million and $1.03 billion, respectively. These were also peaks.

Venture capital has had a good run recently, according to multiple third parties looking at different data sets. Returns reached an all-time high in 2020, even as global economies were decimated by the coronavirus pandemic.

While later stage deals have been stronger recently, younger angel and seed-stage companies had a strong quarter in terms of the number and value of deals. In 2021, the average angel-deal size hit a record high of around $2 million, and average seed-deal size maintained its 2020 record of $4 million. The paper attributes the strong performance to increased activity from large investors in these types of deals and the surprising strength of companies at the early stages of the venture cycle. 

“Companies saw their valuations grow at an annualized rate of 58 percent from their previous round, a 15 percent jump over the rate recorded for the full year 2020,” according to the paper's authors. “Enthusiasm for venture has moved well beyond the late stage, and with the growth in capital available for the industry, we expect this trend to manifest at the angel and seed stage as well. The rise of solo capitalists, changes to crowdfunding rules, and growth in rolling-fund allocations are trends that will impact activity at these earliest venture stages.” 

In the first quarter of 2021, investors acquired a 33.3 percent stake, up from 20 percent in 2014. The market also saw 11 early-stage deals with pre-money valuations that either hit or exceeded $500 million, the highest quarterly number ever recorded in PitchBook’s data set. 

“Data from our Q1 2021 PitchBook-NVCA Venture Monitor shows that Q1 deal value is also tracking to set a record high as deal activity has gone from strength to strength and largely rebounded to above pre-pandemic levels,” the report said. “Indeed, many early-stage investors recall Q1 2021 as one of the busiest quarters in their firm’s history.” 

“There’s Fewer Public Companies to Invest In”

While late-stage valuations continue to perform well — reaching record-high levels in 2021’s first quarter — traditionally late-stage investors are hopping on the early-stage bandwagon. Late-stage investors keep investing earlier in the VC lifecycle, the report said. 

“Investors who have traditionally focused on late-stage companies have developed an increased appetite for risk whetted by the stellar returns and strong multiples on invested capital (MOIC) associated with the plethora of unicorns that accessed the public markets in the last year, including Airbnb, Doordash, Roblox, and Palantir, to name a few,” the report said. 

Record-high levels in exit activity in both public listing and acquisitions “validate” high private valuations, the report said. 

“The fact that, even at extremely high valuations, these companies are largely able to exit at a valuation step-up is going to continue to bring in large investors,” Kyle Stanford, venture capital analyst at PitchBook, told Institutional Investor

The report also notes that the VC deals in the first quarter of 2021 were largely composed of “non-traditional investor” activity. Non-traditional investors include mutual funds, hedge funds, and private equity firms that are not VC investors, said Stanford. 

“Q1 was the highest quarter for activity that we've ever seen from these investors,” Stanford said. A lot of that is because of what has happened over the past 10 years. There's fewer public companies to invest in. Also, private companies are staying private longer and achieving higher growth in their valuation before they go public.” 

Stanford said non-traditional investors are crossing into the private markets to plant a stake in the growth occurring in the sector. 

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