How Well Is VC Doing This Year? Very, Very Well

With large valuations for its companies, venture firms are raising a record amount in 2021.

Nothing ventured, nothing … There have been historic gains in venture capital (VC) this year. And we still have over a month to go.

This year is on track for a record in venture capital fund raising. VC investment, over this year’s first nine months, has eclipsed the record of $166.4 billion set in all of 2020 by more than 43%, according to accounting and consulting firm EisnerAmper.

Venture capital exit value (where the companies the firms have invested in go public or get sold privately) in this year’s third quarter alone was greater than the full-year exit values in every year during the past decade, except for 2019 and 2020, EisnerAmper reported.

The VC valuation expansions, analysts say, are propelled by a rise in valuations owing to institutional and other large investors shifting out of once-hot hedge funds into another alternative asset that, let’s face it, isn’t very liquid.

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Another factor is that public pensions funds have more money to play with, per Pew Charitable Trusts. That’s the result of an increase in assets of more than $500 billion in state retirement plans, thanks to investment returns of 25% and up in fiscal 2021 (ending June 30) and sizable increases in pension contributions from taxpayers and public employees. VC, along with its cousin private equity, are the best-performing alts.

When Lemonade, a mobile-based insurance startup, went public in July 2020, at $29 a share, it shot up to almost $150. While the stock has since backed off that high, it still is up 66% post-debut. Original venture investors were Silicon Valley stalwart Sequoia Capital and Israel-based Aleph. Today, Lemonade is trading at 45 times trailing 12 months revenues, said Don Butler, managing director at investing firm Thomvest Ventures.

Pitchbook research found that cryptocurrency/blockchain had the largest valuation boost thus far in 2021. Take Open Sea, a marketplace for digital assets, which was valued at $1.5 billion in its latest venture fund-raising round in July, led by VC firm Andreessen Horowitz. Pitchbook said this was more than 19 times the value the company reached after its previous VC influx.

Other notable valuation jumps in that sector—which promises to transform the internet—were CoinList, Element Finance, and MobileCoin, each climbing more than 10 times their previous levels.

Cybersecurity has been another hot area, what with a host of cyberattacks bedeviling the world. Big valuations hops were seen with Horizon3.ai and Lacework. Their values rose by more than 10 and 15 times, respectively.

Another strong segment that VC investors have favored is digital health care, Pitchbook noted. Reify Health, which focuses on decentralized clinical trials, rose 12.4 times its original value. And the weight loss management app Noom’s value expanded almost 11 times to $4.24 billion.

Priority Gaps Between Management and Investors Are Shrinking, EY Says

The two groups seem to agree that prioritizing talent management is key to success.

By Anna Gordon

Ernst & Young (EY) has just completed its survey of alternative investment fund managers, and the results in some areas may be surprising. According to the survey, investors and managers have seen a greater convergence over the past year in how they view key issues such as talent management and environmental, social, and governance (ESG) initiatives.

The survey was conducted via interviews through the firm Greenwich Associates and included responses from hedge fund managers, private equity managers, and institutional investors. Of the 210 managers surveyed, approximately half worked at hedge funds, while the other half worked in private equity. An additional 54 interviews were conducted with institutional investors. Ernst & Young also provided data that compared this year’s responses to last year’s responses.

In 2020, 11% of managers ranked talent management as their No. 1 priority, in comparison to just 19% of investors. This year, perhaps due to a greater national awareness of the importance of diversity, a whopping 37% percent of managers listed talent management as their top priority, more than three times the value for the previous year. However, investors did not seem to change their positions nearly as dramatically, with 20% saying it was their No. 1 priority this year, a 1 percentage point increase from 2020.

“Investors seem to be moving in the same direction as managers,” said Natalie Deak Jaros, EY Americas Wealth & Asset Management (WAM) co-leader and WAM assurance leader. She says that one of the things that surprised her the most about this survey was how quickly certain trends seemed to take hold. “I think particularly on the talent front, if you look at trends like, for example, a hybrid way of working, more than half of the alternative industry said they would prioritize offering this as a way forward.”

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She said she believes that had the firm asked the same question two or three years ago, less than 10% of managers and investors would have said the same thing.

Gaps between managers and investors appear to be growing smaller on other issues as well. Eleven percent of managers stated that ESG initiatives were their No. 1 priority compared with just 3% saying the same thing last year. This brings them closer in line with investors, of whom 17% said it was a top priority in 2020 and 22% said it was a No. 1 priority in 2021.

For institutional investors looking to put money into alternatives, this news bodes well since it means they will be more likely to find organizations in line with their ESG and diversity values. Nevertheless, managers and investors have a ways to go before they completely converge in regard to their priorities.