The roaring 2021s

By the end of September American startups had raised $238.7bn across 12,837 deals, according to the latest Venture Monitor from PitchBook and the National Venture Capital Association.^{1NVCA and PitchBookU.S. Venture Exits Surpass $500 Billion For First Time, Doubling Previous Annual Record14 Oct 2021} The previous record for a whole year, set in 2020, was $166.4bn.^{1NVCA and PitchBookU.S. Venture Exits Surpass $500 Billion For First Time, Doubling Previous Annual Record14 Oct 2021} The industry passed it with a quarter to spare and did not stop for breath.

Nor is the boom confined to America. Crunchbase, another data provider, counts $160bn of venture funding worldwide in the third quarter alone.^{2Crunchbase NewsThe Q3 2021 Global Venture Capital Report: Record Funding Trend Held Strong6 Oct 2021} Before this year no single quarter had topped $100bn. In 2021 all three have.^{2Crunchbase NewsThe Q3 2021 Global Venture Capital Report: Record Funding Trend Held Strong6 Oct 2021} The world’s total for the first nine months, $454bn, already beats the $332bn raised in all of 2020.^{2Crunchbase NewsThe Q3 2021 Global Venture Capital Report: Record Funding Trend Held Strong6 Oct 2021} In the third quarter 142 more firms became unicorns, startups valued at $1bn or more, and Crunchbase’s list of them now runs past 1,000 names.^{2Crunchbase NewsThe Q3 2021 Global Venture Capital Report: Record Funding Trend Held Strong6 Oct 2021}

• America
• World

Party like it's 2021. Venture capital invested, $bn

	America	World
2020, full year	166.4	332
2021, January-September	238.7	454

Source: PitchBook-NVCA Venture Monitor, Q3 2021; Crunchbase News¹²

The money has also changed shape. Rounds of $100m or more, once the sort of thing a company raised on the eve of going public, are now routine. PitchBook counts 597 of them in America so far this year, against 333 in all of 2020, and they account for 57.2% of the capital invested.^{1NVCA and PitchBookU.S. Venture Exits Surpass $500 Billion For First Time, Doubling Previous Annual Record14 Oct 2021} Globally, Crunchbase reckons $103bn of the third quarter’s money, 64% of it, went to just 400 companies.^{2Crunchbase NewsThe Q3 2021 Global Venture Capital Report: Record Funding Trend Held Strong6 Oct 2021}

The new money comes increasingly from outside the venture business. “Nontraditional” investors, a group that includes hedge funds, mutual funds and corporations, took part in deals making up 77% of the year’s investment value in America.^{1NVCA and PitchBookU.S. Venture Exits Surpass $500 Billion For First Time, Doubling Previous Annual Record14 Oct 2021} Exits are flowing back just as fast: $582.5bn of liquid value in nine months, most of it from listings, with Robinhood’s $30bn debut the largest of the third quarter.^{1NVCA and PitchBookU.S. Venture Exits Surpass $500 Billion For First Time, Doubling Previous Annual Record14 Oct 2021} When the exits pay, limited partners (the pension funds and endowments behind venture funds) hand over more. Venture firms have already raised $96bn this year, another record.^{1NVCA and PitchBookU.S. Venture Exits Surpass $500 Billion For First Time, Doubling Previous Annual Record14 Oct 2021}

Optimists say this is a lasting change and not froth. Software eats more of the economy each year. The pandemic pushed shopping, work and medicine online years ahead of schedule. Companies stay private for longer, so more of their growth happens in the private markets where venture money lives. “2021 is on pace to set records on every key venture capital metric,”^{1NVCA and PitchBookU.S. Venture Exits Surpass $500 Billion For First Time, Doubling Previous Annual Record14 Oct 2021} says Byron Deeter of Bessemer Venture Partners, and on the numbers he is right.^{1NVCA and PitchBookU.S. Venture Exits Surpass $500 Billion For First Time, Doubling Previous Annual Record14 Oct 2021}

That is the strongest case for the boom, and it is partly true. Demand for software is real, and so are many of the companies being funded. But it explains why valuations should be high, not why they should be this high this quickly. For that, look to the price of money. The Federal Reserve has held its benchmark rate at zero to a quarter of a percentage point^{3Board of Governors of the Federal Reserve SystemFederal Reserve issues FOMC statement22 Sept 2021} . When safe assets pay nothing, a promise of profits in 2030 looks almost as good as cash today, and investors pay up for distant growth. Hedge funds and mutual funds are writing late-stage cheques partly because their other options yield so little.

That prop is starting to wobble. At its meeting on 22 September the Fed said that “a moderation in the pace of asset purchases may soon be warranted”.^{3Board of Governors of the Federal Reserve SystemFederal Reserve issues FOMC statement22 Sept 2021} In plain English, the central bank will soon start buying fewer bonds, and rate rises are likely to follow. The tourists are the money most likely to leave when rates rise, since they came for yield and not for the love of seed rounds. Even the people who count the money are hedging. John Gabbert, PitchBook’s boss, says it is “entirely possible that LPs are hitting the upper limits of their allocation to venture”, and that fundraising could “slow or plateau in coming quarters”.^{1NVCA and PitchBookU.S. Venture Exits Surpass $500 Billion For First Time, Doubling Previous Annual Record14 Oct 2021}

None of this means a crash is imminent. Startups with fresh mega-rounds have years of runway, and a slowdown in deals would take a while to show up in the data. But founders should treat this year’s terms as a peak and not a baseline. The sensible ones will raise what they can while they can, spend it as though the next round might never come, and avoid valuations that will be hard to grow into. A company priced at 50 times revenue on a zero interest rate can look very different at 2%.

Venture capitalists like to say they invest in the future. This year, in large part, they have been investing in the Fed.