A number of large deals dominated the US venture capital market in Q3'21, including Rivian's $2.5 billion fundraising round, Generate's $2 billion raise, Databricks' $1.6 billion raise, Articulate's $1.5 billion funding round, Devoted Health's $1.2 billion funding round, Chime's $1.1 billion and GoPuff's $1 billion raise. In Q3'21, deal sizes increased across all stages as companies attracted larger and larger funding rounds. In the US, growing deal sizes demonstrate that significant amounts of capital continue to flow into the VC market.
The US reached a new fundraising record in Q3'21. Several factors contributed to this. It is taking less time for well-established VC firms with proven track records to raise new funds. While it might have traditionally taken two to three years to transition from wrapping one fund to raising a new fund, some of these firms are now raising funds within 18 months. Furthermore, VC funds are being established by more and more companies, including a number of corporations, which are utilizing their investments to support or expand R&D activities and determine where to invest early in a company.
Despite the challenges of the COVID-19 pandemic, both deal activity and funding pulled back somewhat over the summer months as dealmakers took vacations. In September, activity significantly increased after a brief lull. In the US, the VC market is very hot, with a generous supply of dry powder, strong interest from outside investors, and many exits through IPOs and M&As.
VC investors are still heavily influenced by profit prospects, but the importance of profit is shifting a little bit based on the types of startups. It is still important for VC investors for companies operating in highly transactional sectors, such as ride-sharing, grocery delivery, and short-term rental marketplaces, to demonstrate that they are profitable at the transactional level. When considering companies in industries where there are public entities that have proven that the general business model can be profitable, venture capital investors are asking how and why a startup is similar to how those companies were when they were in their early stages.
Both fintech and healthtech remained hot areas of investment in the US in Q3’21, in part due to the growing diversity of companies in the two spaces. Digital banking attracted the largest fintech deals in Q3;21, including a $1.1 billion raise by Chime, and a $510 million raise by Varo5, although VC investors also showed interest in areas like insurtech, block chain, and B2B financial services. In the healthtech space, Devoted Health raised $1.2 billion this quarter. In addition drug discovery remained popular with US-based VC investors, with eRNA therapeutics company Laronde raising $440 million in Q3’21. Other heath-focused subsectors gaining traction among VC investors in the US include feminine health, robotics, and the integration of AI in day-to-day health system processes.
In the US, all venture investment trends are rising. Finance volume and aggregate value are at record levels for the decade, possibly even surpassing the dot-com era (although inflation must always be factored in when comparing any such periods). In some ways, what these trends also represent for the US is the culmination of the rapid growth of venture capital and the diversification of its ecosystem across a broader range of industries than ever before. Furthermore, it demonstrates how much broader the startup ecosystem in the US is now. Some privately held companies are now larger than many publicly listed ones, yet still are able to raise hundreds of millions in venture capital.
In the past few years, the first-time financing volume has remained steady in the US, albeit at a somewhat slower pace than in the first half of the decade. However, from the beginning of 2018, there was a surge in the average size of first-time financings, resulting in several years of tally increases between $14 billion and $15 billion. Those results may be surpassed in 2021.
Companies and their venture arms continue to contribute significantly to the record VC investment totals, with another approximately $35 billion in VC invested in the US across a record number of completed financings. Companies are increasingly turning to direct investment, corporate venture funds, and corporate development plans to gain exposure and gain a competitive advantage.
As the equities market remains hot, even if it is increasingly volatile, unicorns and mature venture-backed companies continue to go public. In some ways, 2021 has already surpassed the dot-com era in terms of the highs for the decade. The emergence of so many public companies is good for the private market ecosystem because it allows more mature and/or prepared companies to tap into broader capital markets at a greater scale than ever before. Even if the pricing mechanisms in public equity markets are far from perfect, they can still assist both investors and entrepreneurs in evaluating which business models will be able to be validated beyond the realm of private investment.