VC investment yields remain low amid historic year

Following 2020’s record year, more and more capital is pouring into venture as 2021 is poised to set new records. But investments don’t seem to be performing as they once did.

Venture investment yields, despite an otherwise robust environment for venture capital, are historically low as markets emerge from the covid-19 pandemic, according to a recent PitchBook report titled “US Venture Capital: Momentum Out of Uncertainty.”

Recovery has been well underway for the venture industry for some time, benchmarked by 2020’s record fundraising and investment activity. But venture isn’t returning the kind of yield that it used to, forcing investors to enter into riskier territory with their deals.

When compared with recovery from the previous two recessions, the dot-com bubble and the global financial crisis, yields following the onslaught of the covid-19 virus have remained well under 0.5 percent, whereas yields following both of the previous downturns have boasted yields that sit well above 1 percent. Venture yields following the GFC oscillated mostly between 1.5 and 2 percent.

But venture investments tend to move in accordance with public markets activity, according to the report, which helps to explain last year’s highs in venture as well as the public markets, despite slowdowns at other private market segments.

And large tech stocks – such as Facebook, Amazon and Netflix – have been doing exceedingly well since March 2020, making allocations to VC more enticing and pushing investors to seek value in the next crop of tech companies, according to the report.

Plus, private companies are experiencing a period of lofty valuations, which translates even further to larger gains for pre-IPO shareholders and an even more attractive investment landscape for private tech companies.

This also turns into wider market ebullience, which can be seen in the 2020’s record-breaking fundraising numbers that have carried over into the first six months of 2021.

Coming off this fundraising frenzy, VC investors are increasing the number of deals they’re involved in, as the top 1 percent most active firms in 2020 participated in 41.4 percent of deals, compared with just 25.6 percent of deals in 2009.

But the VC market isn’t necessarily widening. Since 2006, an increasing share of capital has flowed into fewer sectors, according to the Herfendahl-Hirschman (HHI) Index which measures market concentration. For example, in 2006, 22.5 percent of VC capital was invested in software, whereas in 2021, it was 33.8 percent.

Furthermore, more money is being raised by fewer managers as mega-fundraising and dealflow reaches new heights this year, raising more than $48 billion across 34 vehicles in the first half of 2021. As such, dry powder has reached unprecedented highs, with the largest share (73.8 percent) of VC dry powder sitting in 2019 to 2021-vintage funds.