Venture Capital Investors Go for the Sure Bet

Venture capitalists in North America closed a record $71bn in deals in the first quarter as a post-COVID future moves closer to reality

North American venture capital was strong off the blocks in the first quarter of 2021, with more than $71bn (Fig. 1) in funds deployed, already half of 2020’s total. But why now? Perhaps investors are betting on a US economic recovery to pre-pandemic levels, or maybe even stronger. 

Since the start of the year, signs of the recovery have been apparent. The steepening Treasury curve is signaling positive investor sentiment while the S&P 500 index is up more than 10% year-to-date. Job opportunities are on the up, and rhetoric from the new Biden administration is nodding to investing in technology and infrastructure, among other areas.

So where did all that $71bn go? Tech, of course. The sector remained on top, taking the lion’s share (45%) of funding, with healthcare (20%) mean-reverting from a pandemic-driven jump in 2020 funding, but still among the more highly sought business lines. Tech-adjacent industrial companies were also among the top organizations receiving funding during Q1. Electric car developers Rivian, LLC and Lucid Motors USA, Inc. were the two largest deals, receiving $2.7bn and $2.5bn, respectively.

Betting on Sure Things
As investors loosened the purse strings, the risks they were willing to take became clear. Late-stage investments were favored compared to riskier early rounds. Cash outlays between the seed stage and third round were up roughly 62% from their 12-quarter average, while the later rounds saw a 165% increase in activity (Fig. 2). Later-round deals generally see larger investments in established portfolio companies. Early rounds, however, are smaller in size and larger in number with the investor expecting to hit on some of their bets, but the first quarter saw a significantly greater bifurcation. In dollar terms, the average round-eight financing was $539mn higher than first round, up from $190mn in 2019, and $220mn in 2018.  

Indeed, two of the ‘unicorn’ $1bn+ deals were to seventh-round outlays. One ($1.2bn) was to on-demand retail delivery service GoBrands, by a group of investors perhaps hoping that this record deal market will remain as COVID fears fade. The other included $1bn to cloud computing data platform DataBricks.

PIPE Dreams
Private investments in public equities (PIPEs) have been increasingly popular this year. These transactions accounted for more than $12bn in deal activity, or 18% of all venture capital deals, and up significantly from both their 12-quarter average and $8.3bn 2020 total. While these deals were made by a consortium of investors, $8.8tn mega-manager BlackRock had its hand in at least $6.6bn in PIPE deals, including two $1bn+ investments. 

The largest of these PIPE deals was a $2.5bn investment in electric vehicle start-up Lucid Motors, led by Public Investment Fund (Saudi Arabia’s sovereign wealth fund), BlackRock, and Fidelity. The company has yet to officially go public, but will do so via special purpose acquisition company (SPAC) Churchill Capital Corp IV this year. The company plans to have its first production model sedan, the Lucid Air, on the market by fall 2021.

But What Does it All Mean?
The first quarter’s run of venture capital funding may just have been a backlog of 2020 deals put on hold during a year of uncertainty, and this year’s jump in activity reflected that. Or it may have been a reflection of the outlook of the industries involved and their position coming out of the pandemic, specifically, those involved in electric vehicles, cloud computing, and on-demand services. Whatever the prime movers are, the trend underlying activity so far this year is focused low-risk bets. Despite seeming to counteract with each other, the scars of the pandemic remain and many investors aren’t as willing to put capital out there to unproven companies and technologies. The road ahead may be rough for entrepreneurs looking to get a product off the ground.