US late-stage investment spikes in Q1, fueling exits

Late-stage deals in Q1 accounted for 75.2% of deal volume, fueling exits and driving up deal values, according to the Q1 VC PitchBook-NVCA report.

Late-stage venture capital investment in the US market accounted for more than 75 percent of the $69 billion invested into VC-backed companies in Q1, according to PitchBook and NVCA’s Q1 2021 Venture Monitor report.

Coming off its largest year yet with a significant jump, investment into US VC-backed companies has increased 92.6 percent compared with the same period last year.

Overall, late-stage activity in the first quarter built on the momentum from the second half of last year, with more than $51.9 billion deployed across an estimated 1,291 deals, according to the latest quarterly report.

“By a wide margin, this is the largest quarterly total for capital investment we have ever recorded,” the report said.

The report predicts a potential flurry of exit activity correlated to the industry-wide transition that has come to dominate two-thirds of all VC investment.

“The focus on late-stage investments may be the harbinger of a surge in exit activity, with many portfolio companies possibly ready to go public or be acquired,” the report said. “Ebullient public markets may play a role in any such enthusiasm among investors and founders.”

The report also details that the first quarter saw a surge in public listings, with 50 venture-backed companies going public. Between 2015 and 2020, the number of IPOs ranged from nine to 21 listings in any single quarter.

Billion-dollar funds surged

Q1 also saw fundraising proceed at a record-setting pace, with $32.7 billion raised across 141 funds, following a record-breaking $79.8 billion raised last year.

Funds $1 billion or larger that closed in the first quarter accounted for $14.7 billion, or about half of all the capital raised by US firms, the highest quarterly share of total capital raised by funds of this size over the last 16 years, according to the report.

The growing size of deal values could be in part attributed to the growing size of funds closing, as “bigger checks must be written to obtain the same rate of return, all else being equal,” the report said.

Even mega-deals have risen to new heights, as 167 VC deals valued at $100 million or more closed in Q1, representing $41.7 billion in investment. This, too, is on pace to break a new record for both count and value for mega-deals.

“This also means that 13.5 percent of the recorded late-stage VC deals in Q1 fall under this category, demonstrating how these transactions – considered to be anomalies only a few years ago – have become commonplace,” the report mentioned.

Meanwhile, a wider market bifurcation of fundraising markets continued in Q1: $1.4 billion of capital across 25 funds was raised by first-time VC managers, alongside the 13 mega-funds ($500 million or more) that were raised, with billion-dollar funds accounting for 44.8 percent of all capital in the quarter. The attention paid to mega-funds over first-time managers could, at least partially, be attributed to the lack of in-person meetings over the last year and the generally uncertain operating environment.

But the concentration of capital going to the end of the market is driving valuations up, which, given the state of the SPAC market over the last year, has the potential to drive up valuations even further.

“As a new pool of capital that does target some late-stage businesses, SPACs may serve as another route to liquidity for VC backers, but they also have the potential to drive up late-stage pricing, since SPACs combinations compete directly with the late-stage VC market,” the report said.

This will have to be a consideration for late-stage investors for years to come, the report added. But the VC market is undergoing wider shifts, as the market begins to facilitate the entrance of new managers and investors alike.

“If any story has come to encapsulate the current venture market, nontraditional investment activity is likely to be just that,” the report said. “2020 ended with a record nontraditional participation in venture for both deal count and deal value, reaching past 4,000 deals and $125 billion, respectively.”

In Q1, nontraditional investors, such as corporate VCS, put $54.3 billion to work across 926 deals, another new record.