In just nine months, 2021 broke all records for US startup funding, by a towering margin.
US startups raised roughly $240 billion as of Sept. 30, dwarfing 2020’s full-year total of $166 billion, according to figures from Pitchbook, the venture-capital database.
A busy IPO market is one reason for the boom. Lately, startups have been listing on the US stock market at sky-high valuations, delivering huge returns for their early investors. As a result, venture capitalists have more money to invest in new startups. Meanwhile, a greater number of nontraditional early-stage funders—including mutual funds, private equity firms, and hedge funds—have been lured into the startup market.
Startups are now more flush with cash than ever before, fueling renewed worries that the economy is in the midst of a venture-capital bubble that may lead to a downturn on the scale of the 2000 dot-com bust.
Tech startups see massive funding growth
Much of the funding in 2021 has gone to tech startups. During the pandemic, investors have been eager to put their money behind the companies that are building software that helps people work, shop, connect with loved ones, and stave off boredom at home. Tech is one of the few sectors still delivering massive returns amid inflation fears, supply-chain chaos, and economic disruptions from the extra-contagious delta variant of covid-19.
Remote work startups, in particular, have benefited from the boom. Enterprise software startups account for nearly half of the venture capital funding doled out so far in 2021.
Nontraditional investors are breaking into venture capital
Venture capital firms are no longer the only—or even the biggest—game in town when it comes to startup funding, according to Pitchbook’s analysis. The firm estimates that traditional venture funds have about $221 billion in cash on hand to invest, compared with the $350 billion that nontraditional startup backers like hedge fund Tiger Global and private-equity firm SoftBank are prepared to invest in startups.
“This capital, and the swiftness with which nontraditional investors can make investments, will likely continue to push yearly deal values higher,” Pitchbook analysts wrote in an Oct. 13 report. “Nontraditionals have been linked to the venture market’s rise, and any decline in venture financing amounts will likely be linked to a pullback by them as well, although we don’t see such a pullback on the horizon.”
The rise of “mega-deals” and massive exits
2021 has been a banner year for startup acquisitions and stock listings, both of which allow early funders to recoup their initial investments—plus a handsome profit, if the startup’s valuation has grown enough. These lucrative exits are the siren song that have attracted so many investors into the startup market in recent months.
The glut of eager funders has made it easier for startups to cobble together large funding rounds. Pitchbook data reveals a spike in what it terms “mega-deals,” investment rounds that total more than $100 million.
Puffed-up funding rounds like these have minted 373 new startups with $1 billion valuations in 2021 alone, according to data from CB Insights. Once rare, these so-called unicorns have become commonplace.