{"id":8085,"date":"2021-08-30T16:24:03","date_gmt":"2021-08-30T23:24:03","guid":{"rendered":"https:\/\/maccelerator.la\/?p=8085"},"modified":"2021-09-16T23:10:37","modified_gmt":"2021-09-17T06:10:37","slug":"pe-growth","status":"publish","type":"post","link":"https:\/\/maccelerator.la\/en\/blog\/venture-capital\/pe-growth\/","title":{"rendered":"PE Growth"},"content":{"rendered":"\n

In the past 15 years, Private Equity<\/a> has grown in a fashion that exceeds each previous year. With every new year being a record year, it is worth speculating whether this kind of growth<\/a> is sustainable. <\/p>\n\n\n\n

Is PE headed toward a bubble burst? Or is this just the real value of this economic sector?\u00a0<\/strong><\/p>\n\n\n\n

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\"Private<\/figure>\n\n\n\n

When many parts of the economy stagnated or slowed to a stall during the COVID pandemic, PE only continued to grow and defy expectations. <\/p>\n\n\n\n

In addition, a recent report on Venture Capital’s 10-year return indicates that private equity has outperformed traditional sectors such as real estate and credit card funds.\u00a0<\/p>\n\n\n\n

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Are PE and VC Growing?<\/h2>\n\n\n\n

Well, what has 2021 been like? Booming<\/strong><\/p>\n\n\n\n

50 companies IPO\u2019d in the first quarter of 2021 which is more than 5 times the average historically. The market nowadays moves fast and is incredibly competitive, flush with capital and startups. According to a study by Pitchbook-NVCA<\/a>, valuations are rising at every stage of fundraising. <\/p>\n\n\n\n

The average early stage pre-money valuation has grown by more than two times from $60M last year to $110M this year<\/strong>. Late stage round valuations have increased even more impressively, by almost 4 times<\/strong> to an average of $1.6B. Indeed, everything is growing faster than ever.\u00a0<\/p>\n\n\n\n

Just 20 years ago, subscription based businesses would take 10 or more years to reach $100M in Annual Recurring Revenue. Now, startups like HashiCorp and Twilio reach this benchmark in just a few years. In addition, 250 companies have joined the elusive title list of \u201cUnicorn\u201d in just these first two quarters of 2021, compared to 161 in all of 2020. Since startups are growing so fast, valuations have in turn grown higher and faster to appraise these companies. <\/p>\n\n\n\n

According to Crunchbase<\/a>, Venture capital funding<\/a> in the first two quarters of 2021 broke records with more than $288B invested into startups globally. This is an increase of more than $100B<\/strong> from the last two quarters of the previous year in 2020. <\/p>\n\n\n\n

Private equity\u2019s success is directly tied to venture capital\u2019s success. Venture capital\u2019s 10 year annualized returns were higher than credit card funds, real estate, and buyout funds! In addition, low interest rates via the Fed and other policy bolsters continue to stimulate Venture Capital\u2019s rapid growth and ascendency. <\/p>\n\n\n\n

Venture capital is just too attractive and has attracted many non-traditional investors to join the field, further contributing to the shift from public markets to private markets. Traditional institutions are re-investing more into their funds and non-traditional investment institutions are increasing their stake as well, about 50 percent of new venture funds are at least $1 billion in size.<\/p>\n\n\n\n

Private markets are swelling because private companies are swelling from higher valuations and so for each round, investors are writing larger and larger checks to startups.<\/p>\n\n\n\n

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Growth is happening at all stages of startup funding raising. <\/strong><\/p>\n\n\n\n

At the early stage level, fundraising got up to around $43B in the second quarter of 2021 worldwide,<\/strong> which is an increase of 66 percent from last year.<\/p>\n\n\n\n

Late stage fundraising was especially successful and saw more than $191.5B invested worldwide, growing around $10B from quarter 1 to quarter 2. This might be the effects of a more widely distributed vaccine and things starting to have opened up more. The proportion of total funding across all stages of fundraising was more heavily skewed to the late stage so far this year. Even though the amount for fundraising went to fewer startups at the later rounds. <\/p>\n\n\n\n

Beyond that, somehow the amount of capital that was allocated to female founded companies fell from 2.8 percent in 2019 to 2.3 percent in 2020. As time passes and we believe ourselves to make progress in society, it seems inexplicable and incredibly disappointing that not only did that percentage fall but that it is so low in the first place.<\/p>\n\n\n\n

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Who are the players?<\/h3>\n\n\n\n

According to Crunchbase<\/a>, it\u2019s something like 50 investment players composed of private equity firms, investment banks, pension funds, and hedge funds each invested at least $1B in equity deals. Even sovereign wealth funds participated greatly contributing to the increase in players investing mega amounts from last year.<\/p>\n\n\n\n

\"Global<\/figure>\n\n\n\n
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Startups at the top of their class used to exit between $1B-$5B half a decade to a decade ago, incredibly impressive at the time and the object of envy. Now, startups at the top of their class exit anywhere between $10B and $30B! Valuations have indeed skyrocketed in the past decade and there are now even firms that work to short startups that they think are overvalued. <\/p>\n\n\n\n

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Why is VC growing?<\/h2>\n\n\n\n

Valuations and companies are growing so fast because of important leaps in cloud-based technology and automation(near AI). It seems like every new startup incorporates Machine Learning<\/a> and cloud technology into their products and business models.<\/p>\n\n\n\n

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Where is PE headed?<\/h2>\n\n\n\n

The Private Equity landscape is no longer nebulous but remains ever mercurial. One shift that has been gaining traction over the years is the shift from public markets to private markets. Many large tech companies are choosing to remain private for longer, foregoing entering the public market. This has increased the median age of companies going public by 50% compared to 20 years ago. <\/p>\n\n\n\n

As investment firms continue to funnel money into these companies, the proportion of investment in private markets also grows. We are in the midst of a fundamental shift from public markets to private markets. Firms like SoftBank are among the largest investors in the private market, dumping tons of cash into the market every year. <\/p>\n\n\n\n

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Why are these tech companies opting to stay private? <\/h3>\n\n\n\n

Well, for many companies going public is a means to sustain growth and scale<\/a> up using the capital that pours in when a company IPOs. Beyond more capital being allocated to the private market, costs to IPO have been rising and the cost to scale has decreased because of technological advancements such as the cloud. <\/p>\n\n\n\n

With so many players in the field, smaller funds try to fit into an investment niche and the big players want a slice of everything. But one thing is common, everybody wants to get in early. Or at least have some kind of presence in the early stage market. While it may be harder for a traditionally early stage investor to gather funds to enter later stages, it\u2019s proven to be fairly easy for late stage institutions to enter the early stage space. <\/p>\n\n\n\n

There has been an increase in aggregate stakeholders in venture capital but the amount of new startups (while very large) has remained the same, creating a skewed landscape. Investors have to compete to be able to invest! <\/p>\n\n\n\n

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How do they compete?<\/h3>\n\n\n\n

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Getting in early<\/strong><\/p>\n\n\n\n