Venture Capital

Venture Capital

Industry Outlook

The venture capital industry has experienced strong growth in recent years (despite a temporary drop in fundraising, IPOSs, and exits during the COVID-19 pandemic). In fact, despite a projected 1.4 percent decline in 2020, the venture capital and principal trading industry in the U.S. experienced an average growth rate of 7.7 percent 2015 through 2020, according to research group IBISWorld. According to a Harvard Business School article, the majority of venture capitalists (participants in an academic survey) predicted that despite the economic slowdown during the pandemic, they expected their funds to prosper by the end of 2020.

The following statistics from the National Venture Capital Association (NVCA) and PitchBook demonstrate that the VC industry is experiencing a renaissance from a decade or so ago (all statistics refer to the U.S. VC industry unless otherwise indicated):

  • VC firms had $444 billion in capital under management in 2019, up from $266.5 billion in 2011. During that same year, investment fundraising reached $51 billion, up from $25.3 billion in 2011.
  • In 2019, $133 billion was invested in U.S. venture capital–backed companies (up from $71.9 billion in 2017).
  • Total annual global venture capital funding reached $257.3 billion across more than 23,268 deals in 2019 (up from $161.8 billion invested across 21,286 deals in 2016).
  • 2019 was a record year for exit value following a buildup of large, late-stage companies in the private markets; 82 venture-backed IPOs represented $199 billion in exit value.
  • The median fund size was $80 million in 2019, down from $133.0 million in 2007, but an increase from $37.5 million in 2013.

As of late 2020, the U.S. venture capital and principal trading industry was valued at $38 billion, with 39,361 businesses employing nearly 80,000 people. The accelerated distribution of the COVID-19 vaccine in 2021 will bolster the economy and financial market conditions will improve, further boosting the venture capital industry. Steady growth in this industry is anticipated through 2025. Post pandemic, as the economy rebounds, security prices will rise, which means small and start-up companies will have better odds of succeeding. As described by IBISWorld, "venture capitalists will profit from higher valued initial public offerings and greater demand from companies that can afford to acquire new businesses." New funds in the venture capital industry will also stem from growth in employment levels and subsequent increase in disposable income.

The healthy VC market is creating demand for skilled professionals. One fast-growing career is that of financial analyst (although they may be known as “analysts” or “associates” in the VC industry). Job opportunities for analysts are expected to grow by 5 percent from 2019 to 2029, according to the U.S. Department of Labor, or faster than the average for all careers. Employment for analysts who work with funds, trusts, and other financial vehicles will increase by 6 percent during this same time span. Other fast-growing careers include those in accounting/compliance, data analytics/warehousing/analysis, computer security, and marketing. Although demand continues for experienced VC professionals, it’s important to remember that the industry remains small and very difficult to break into (especially for recent college graduates with little or no operational or deal-making experience). Aspiring venture capitalists are advised to earn an MBA, obtain several years of experience in related industries (e.g., private equity, investment banking), and develop a strong professional network in order to increase their chances of landing a job.

The hottest sectors for venture capital funding include pharmaceuticals, biotechnology, blockchain technology, artificial intelligence and machine learning, voice-centric devices, fintech, augmented reality, healthtech, foodtech, dentaltech, green energy, self-driving vehicles, and home automation. The Covid-19 pandemic—which began in 2019 in China, but spread to more than 210 countries—created demand for some medical and information technology products and services. In the health care field, VC firms are increasing funding to startups that are developing telemedicine (including remote patient monitoring), mental health, and supply chain management apps, as well as medical robots, vaccines, antivirals, antibacterials, and disease testing and respiratory care and therapy equipment. In-demand tech areas included online communication and collaboration software for businesses and consumers, artificial intelligence/machine learning, online education, ecommerce, cybersecurity, content streaming services, and food delivery service apps.

One noteworthy trend is the rapid growth of corporate venture capital units. In 2019, 1,776 venture capital deals involved corporate venture capital (CVC) participation; 2019 marked the seventh consecutive year of more than 1,200 venture investments with CVC participation, according to the National Venture Capital Association. “Companies as diverse as convenience stores (7-Eleven), chemists (Boots), financial firms (Visa and Citigroup), and carmakers (BMW) are all getting into the game,” reports The Economist. “They are looking for quicker, cheaper, and better sources of innovation than research and development, which often disappoints. In return, the startups they invest in benefit from their capital, expertise, and connections.” The insurance industry has become an especially big corporate player.

Although the venture capital sector is an upswing (especially in regard to fundraising for tech and medical startups), some industry watchers fear a repeat of the 2000 dot-com crash, during which many tech startups became overhyped and overvalued (before falling flat after the IPOs), resulting in many dot-coms folding, others losing a large portion of their market capitalization, and still others riding out the storm and bouncing back.

The dot-com crash not only had a negative effect on the tech industry, but also on the entire U.S. economy. Industry experts acknowledge the possibility of a dot-com bubble, but believe that the potential crash will be nothing like the one in 2000 because many VC-backed companies currently going public (or about to) are more mature and better equipped to grow and perform well in the free market.