• vsvijay103

2022 US VENTURE CAPITAL OUTLOOK


Prediction:


Public listings of VC-backed businesses will show a YoY increase in count in 2022.


Rationale:


The overall size of VC has exploded in the last five years, with the acceleration in VC mega-deal activity especially notable as of late according to Pitchbook Analysts. This phenomenon has resulted in the rapid growth in the general inventory of currently VC-backed companies that are valued at a realistic level to test the public markets. Nearly 700 currently VC-backed companies are valued above the median size of a 2021 public listing, providing more than enough gas in the tank to surpass the 220-plus count from 2021.


Caveat:


This outlook relies heavily on market whims, which can change quickly, especially given the current above-average level of valuation multiples creating a more precarious position in the public markets. Inflationary pressures and increasing expectations for interest rate hikes have been met with a swift downtrend in price, especially within the technology sector. This volatility and potential for a negative pricing environment will discourage the acceleration of IPO activity, particularly for companies that have other options for financing or liquidity.


When comparing the VC-backed IPO data from 2021 to the rest of their dataset, this year seems like something that might happen only once in a lifetime, but sustainable levels near these could be more realistic than one would think. The real story may be more about what VC looks like in this current moment relative to the past. If we zoom out a bit from IPOs, it becomes evident how much VC has matured over the last decade. Gone are the days when VC was not much more than a cottage industry; currently, annual capital investment sits at over $150 billion, and more than $110 billion has been raised by VC funds in the US this year alone. And this growth has not only been significant but also extremely consistent. To track this trend, they ran an analysis monitoring how each subsequent month’s deal value tracks relative to all of the preceding months going back to 2006. We found that over 50% of the time, the current month was in the top decile of all observed months’ total capital investment. For example, in March of 2015, they recorded $7.3 billion in capital investment, which was in the 98th percentile of all observed monthly deal value at the time. All that to say, every other month over the last 15 years has been in the top 10% for capital investment of all months on record.


However, this outlook is about IPOs, not the VC deal making climate. But the two are quite closely related. This extended period of more dollars flowing to start-ups has culminated in the swelling inventory of highly valued companies that remain under VC backing. The exponential growth in megadeal activity ($100 million and more) over the last few years is the culmination of these trends. This activity has grown from a mere 38 in 2013 to over 600 in 2021, which has delayed many IPOs but also serves as a steppingstone to an exit via public listing.


For context, in the standout year that has been 2021, there were recorded 221 US exits via public listing through September 30 at a median valuation of $630.8 million and an average valuation of $3.3 billion. Compared to the inventory of privately held companies, currently 1,286 companies are valued at over $300 million in the US alone. Among these, 696 are valued at over the median public listing size, 508 are valued at over $1 billion, and an astonishing 121 companies are valued above the $3.3 billion average IPO size in 2021. This is an outlook on the count of IPOs notching a YoY increase, so we are not necessarily predicting greater exit value from public listings, but to complete the picture, those 1,286 start-ups represent $2 trillion in value. For illustration, at the median valuation step-up of 1.6x at IPO that they recorded so far in 2021, those companies represent upward of $3.5 trillion in potential exit value over the next few years. These figures do rely on optimistic assumptions because not all of these companies will find an exit via IPO or even hold their current valuation. Moreover, the exits for that many businesses will undoubtedly stretch over many years, given different needs for financing and liquidity. To gain some insight into the timing of these exits, the median and average years since last VC deal for the whole set of 1,286 companies is 0.57 years and 1.12 years—relative to a median and average of 0.45 years and 0.82 years for companies at unicorn status. These levels in aggregate do not portray a desperate need for liquidity that an average of two years would, but many of these companies will likely still need to raise more capital or find an exit during 2022. Once the final total of VC-backed public listings is tallied, it can be assumed that we would need to see at least 250 to 300 public listings in 2022 to record sequential growth. This represents only around 20% to 25% of that initial group of 1,286 potential IPO-ready businesses. That being said, the IPO market is notoriously difficult to predict as changes in investor sentiment and the market volatility that can follow have the ability to wreak havoc on private companies’ plans to make the jump to public markets. This is especially relevant at the time of writing, as we have just experienced a period of turbulence within the public market, particularly revolving around many high-growth technology businesses. The VC-backed IPO index underperformed the S&P 500 through our recent data pull on November 23, 2021; if this trend is sustained further into 2022, it could put a damper on this outlook.

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