Record investments in the tech sector
INSIGHT ARTICLE |
Authored by RSM Canada
The technology ecosystem has continued its strong performance as deal-making, fundraising and exits have either established, or are on pace to establish, new records. Here is a detailed look at private equity and venture capital fundraising and deal-making, as well as an overview of the state of the public markets for TMT companies.
The pull forward of productivity-enhancing technologies by enterprises, continued innovative progress in areas like health care, finance and education, and the promise of frontier technologies and space, electric and autonomous vehicles continue to provide fertile investment ground for PE, VC and corporates that have an abundance of capital. As technology becomes essential and forms the core of every business and business model, our analysts expect the growth trends of fundraising, investing and exits to continue for many years to come.
Venture capital: Venture fundraising is showing no signs of a pullback, with 503 venture funds closing through the end of September and more than $97 billion raised. That amount has already eclipsed the total raised during 2020, a record year for VC fundraising, by more than $15 billion. A primary driver of the growth is the number of VC firms closing $1 billion funds and the frequency at which they’re doing so. This year has seen 19 such funds close to date, raising more than $42 billion in capital, and 41 billion-dollar funds have closed since the start of 2019, raising a total of nearly $84 billion.
The explosive growth in venture funding and the availability of capital for technology startups is driving smaller-tier firms to specialize in niche investing strategies, while companies at all stages of the fundraising cycle continue to see larger and larger median deal sizes. We expect this strong growth in overall VC fundraising to contribute to continued record deal-making for both early-stage and late-stage VC-backed tech companies. Data tracked by PitchBook reveals that tech has accounted for more than 80% of all VC deals in terms of deal value since 2014.
Fresh investing rounds and promising economic conditions have led tech companies to return to pre-pandemic spending and increase cash burn rates for the first time since the start of the pandemic, when spending was quickly pulled back to preserve what cash was then available for as long as possible. For example, a recently published study from Silicon Valley Bank showed that cash runway has decreased from 45 to 36 months for fintech companies, and from 41 to 34 months for enterprise software businesses.
We expect venture fundraising and deal-making to remain robust and active well into 2022 as the technology to provide innovative solutions in sectors like energy, security, finance, health care and enterprise software continues to show promise. High-growth technology companies continue to be well received in the public markets and serve as targets for mergers and acquisitions by large corporations. All of these factors contribute to the robust environment VC and technology companies are currently experiencing.
Private equity: Private equity firms have taken a fond interest in technology companies and the possibility for outsize returns. Historically, firms have achieved those returns primarily in the form of controlling stakes in the companies they invest in, but a recent trend has seen private equity participating in more than 50% of all venture capital deals by total deal value through the first half of 2021, up from just 37% in 2018. According to data monitored by PitchBook, total fundraising by private equity in growth and expansion funds, which typically focus on making minority, venture-like investments, has eclipsed the record set in 2019 of $39 billion in total fundraising. So far, through the end of the third quarter, 55 growth funds have closed this year, raising nearly $44 billion in capital to deploy as minority investments into the tech ecosystem. This year has seen a sharp uptick from 2020, which saw 58 funds close and $27 billion in capital raised. Private equity’s growing participation in venture-backed companies has been a leading contributor to the increase in median deal values across all stages of venture funding, especially late-stage VC.
Additionally, PE has continued its focus on investing in software companies, as total deal counts and deal values through the first half of the year are on pace to surpass the total investment amounts seen in the previous three years. The years 2018 through 2020 saw total PE investment in software companies nearing $100 billion per year, and the first half of 2021 saw nearly $61 billion invested across 407 deals.
Public markets: The public markets—both initial public offerings and special purpose acquisition company transactions—are enjoying a strong year, with technology startups utilizing their growth capital to build business and generate revenue totals that have led to record valuations. According to a study from Silicon Valley Bank, seven of the 25 largest VC-backed tech companies to go public since 2000 have done so this year, and 17 of those IPOs have occurred since the start of 2019. PitchBook data shows that the median revenue of VC-backed technology IPOs this year has grown to $233 million, attracting record-high median valuations at 18.5 times revenue. Altogether, 2021 has seen 34 TMT IPOs or direct listings completed, with the likes of Robinhood, Toast, Duolingo, Coursera and Marqeta all completing their public listings since the start of the year.
SPACs also continue their pursuit of TMT companies, and the same data from PitchBook shows that 31 TMT companies have completed reverse mergers with SPAC vehicles since the start of the year.
We expect IPO and SPAC activity with TMT companies to remain strong through the end of 2022, aligning with the 18- to 24-month time frame for SPACs that had their IPOs during the 2020-2021 craze—which spawned nearly 700 empty shell companies that raised $210 billion in total capital. VC- and private equity-backed TMT companies, especially those that have experienced revenue and customer growth through the pandemic, will have options to evaluate as they contemplate a liquidity event for their investors and employees.
This article was written by Victor Kao, Davis Nordell, Kurt Shenk, Ken Tinnes, Nate Farshchi and originally appeared on 2021-11-12 RSM Canada, and is available online at https://rsmcanada.com/what-we-do/industries/technology-companies/record-investments-in-the-tech-sector.html.
RSM Canada Alliance provides its members with access to resources of RSM Canada Operations ULC, RSM Canada LLP and certain of their affiliates (“RSM Canada”). RSM Canada Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM Canada. RSM Canada LLP is the Canadian member firm of RSM International, a global network of independent audit, tax and consulting firms. Members of RSM Canada Alliance have access to RSM International resources through RSM Canada but are not member firms of RSM International. Visit rsmcanada.com/aboutus for more information regarding RSM Canada and RSM International. The RSM trademark is used under license by RSM Canada. RSM Canada Alliance products and services are proprietary to RSM Canada.
Fletcher Mudryk LLP is a proud member of RSM Canada Alliance, a premier affiliation of independent accounting and consulting firms across North America. RSM Canada Alliance provides our firm with access to resources of RSM, the leading provider of audit, tax and consulting services focused on the middle market. RSM Canada LLP is a licensed CPA firm and the Canadian member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM Canada Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.
For more information on how Fletcher Mudryk LLP can assist you, please call us at (780) 539-4110.