2021 was a spectacular year for the American venture capital ecosystem, with VC investments, fundraising and exits all setting new highs.  That according to the latest PitchBook-NVCA Venture Monitor, the self-described definitive review of the U.S. venture capital ecosystem.  Nevertheless, it is difficult to predict how 2022 will turn out for the VC industry, as it remains to be seen to what extent the tremendous amount of VC fund dry powder will be offset by the headwinds generated by outsized valuations, stock market volatility and inflation-induced interest rate hikes.  For now, let’s take a look at how well the VC industry did this past year.

Investment Activity

U.S. startups raised $329.9 billion in venture investments in 2021, nearly doubling the previous annual record of $166.6 billion set in 2020. Total VC deal count also increased significantly to an estimated 17,054 deals in 2021, up from 12,173 in 2020.

The Venture Monitor covers all equity investments into startup companies headquartered in the U.S. from an outside source, not just from institutional investors, and may include individual angel investors, angel groups, seed funds, VC funds, corporate venture, corporate investors and institutions.  Each subcategory of startup company – seed, angel, early-stage and late-stage[1] – set records in 2021 for total dollars invested and deal count.  There was a combined total of 6,649 seed and angel deals, the first time that number exceeded 5,800.  Early stage deals exceeded $80 billion, just about double the previous record, spread over an estimated 5,351 deals, a 57% increase over the previous year. Finally, over $220 billion was invested in late-stage startups across more than 5,000 deals, more than double 2020’s record in dollars raised and a 47% increase in deal count year-over-year.

Also noteworthy is that 4,000 startups raised their first venture round in 2021, a new record, collectively raising $23.8 billion, also a new record.  Previously, the record high for the number of first financings in a year was 3,704, and the record amount invested in these companies was just $15.3 billion.

Fundraising Activity

Venture capital has outperformed all other private capital asset classes in recent years, including private equity, secondaries, real estate, private debt and funds of funds.  Consequently, investors continued to allocate larger amounts of capital toward venture, which in turn enabled VCs to break fundraising records in 2021.

U.S. VC funds raised a record $128.3 billion across 730 funds in 2021, a 47.5% year-over-year increase as compared with the previous record of $86.9 billion set in 2020. Median and average fundraising value in 2021 jumped to $50 million and $188.1 million, respectively, a significant increase over 2020’s median and average of $42.1 million and $156.9 million.

Venture Monitor defines VC funds as pools of capital raised for the purpose of investing in the equity of startup companies. In addition to funds raised by traditional VC firms, PitchBook also includes funds raised by any institution with that primary intent. But funds identifying as growth-stage vehicles are classified as private equity funds and are not included in the report.

Exit Activity

Perhaps the biggest story of 2021 was the massive exit activity among venture backed companies during the year.  VC backed companies produced approximately $774.1 billion in exit value through public listings and acquisitions, a whopping 168% increase over 2020, with the lion’s share of that – $681.5 billion – being in the form of public listings.  Much of the increased public listing activity was attributed to SPACs, which emerged as a popular alternative to IPOs in 2020 and 2021.  Exit count also set a new record in 2021 with over 1,800 deals closed, which suggests the year’s exit performance was broad based, rather than relying heavily on massive deals.

The lion’s share of exit activity in 2021 went to public listings, producing $681.5 billion of the $774 billion in exits.  A total of 296 venture backed companies completed public listings in 2021, an extraordinary increase of 114.5% over 2020.  Interesting to note that the Venture Monitor changed this category from “IPO” to “public listings”, which includes IPOs, direct listings and reverse mergers via SPACs, to accommodate the different ways it tracks the transition of venture backed companies to public markets.

Predictions for 2022

Despite the phenomenal performance of venture capital in 2021, the prospects for the industry in 2022 will depend on how some tailwinds and developing headwinds play out against one another.  Chief among the tailwinds is the prodigious level of VC investor dry powder.  The venture ecosystem is flush with over $220 billion in untapped cash, according to the Venture Monitor, including nearly $130 billion raised last year and $13 billion already raised in the first week of January of this year.

But there are new challenges heading into 2022, the first of which are the highest levels of inflation in 40 years.  In an effort to mitigate against that, the Federal Reserve has announced it intends to raise interest rates, after more than a decade of near-zero rates, threatening one of the key factors in the recent multi-year bull market — cheap capital – and portending a drag on market stock prices.  This could in turn lead to lower late-stage private company valuations, which means a more difficult exit environment for venture backed companies.

But could lower valuations be a form of winning by losing for the venture industry?  Valuations went through steep escalations last year across all stages of development.  For example, seed pre-money valuations grew to a median of $9.5 million, an increase of 35.7% over the previous record high of $7.0 million in both 2019 and 2020.  Median late-stage pre-money valuations spiked last year to approximately 20 times revenue, nearly double the 10.9x multiple in 2020, according to PitchBook.  Some VCs are concerned about the risk of a bubble forming in the venture capital markets and are suggesting the industry would benefit from a valuation retrenchment.  But lower valuations of course are a double-edged sword for VCs; they want reduced valuations for the initial investment, but higher valuations in subsequent rounds (because the earlier purchased shares get marked up) and on exit.

[1] Venture Monitor considers a seed round to be a round below $500,000 and is the first round as reported by a government filing.  It would be deemed an angel round if there is no prior PE or VC investment in the company and it can’t be determined if any PE or VC firms are participating.  A round is generally classified as early stage if it involves the issuance of Series A or B, and late-stage if Series C or later.