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VCs/start-ups: IPO mania raises funding and valuations

Against the odds, 2020 was an extraordinarily good year for tech start-ups and venture capitalists. This year is going to be even better. 

A boom in initial public offerings has handed some of the biggest names in venture capital lucrative exits. Add in low interest rates, stock markets at record highs, optimism surrounding economic recovery and the rapid digital transformation of multiple sectors and money is flowing freely. The first quarter of 2021 set a new record for global venture funding, with $125bn raised around the world, according to data from Crunchbase. Early-stage funding rose by almost half compared with the previous quarter, to more than $35bn.

Doom-laden warnings of down rounds and a freeze on funding last year have been squashed. Sequoia Capital last spring told companies in its portfolio that private financings could soften “significantly”, calling coronavirus the black swan of 2020. Yet funding and listing postponements were shortlived. Even start-ups without sales, aka “pre-revenue” companies such as aerospace start-up Archer Aviation, are in demand thanks to the rise in special purpose acquisition companies (Spacs) searching for targets.

In the first quarter of 2021, 398 US companies joined markets via initial public offerings, up from just 37 last year. Three-quarters were Spacs. Even excluding the Spac frenzy, the first quarter eclipsed the past five years. This does not include direct listings of Roblox and Coinbase either.

Listing mania has allowed VC firms such as Sequoia and Andreessen Horowitz to cash out on long-term bets and gather more funding firepower. This has already had an impact on valuations. Last year, 121 companies joined the elite group of start-ups valued at $1bn or more, according to CB Insights data. In the first three months of 2021, 78 companies hit the same target. Around the world there are now more than 600 such unicorns, led by China’s ByteDance, which is backed by Sequoia Capital China, and payments processor Stripe, which counts Andreessen Horowitz as an investor.

More money chasing start-ups means higher valuations. The result is likely to be a greater concentration of private fundraising by the small group of VCs who are able to keep up.

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