The venture capital (VC) market in the US finished the year on a high note, setting a fourth consecutive record for VC investment in Q4’21, propelled by $1 billion+ funding rounds by thermonuclear power development company Commonwealth Fusion Systems, food delivery and consumer good company Gopuff, space tourism company Sierra Space, cybersecurity firm Lacework, and e-commerce aggregator Thrasio.
Fundraising soars past $100 billion
Fundraising activity in the US climbed well above $125 billion in 2021, significantly higher than the previous high of $85 billion seen in 2020. A number of factors have contributed to the rise, including a growing number of LPs — such as endowments, university funds, high net worth individuals, and family offices — increasing their allotments dedicated to the VC space.
The increase in fundraising in the US has driven a number of additional trends during 2021, including an increase in specialized funds – such as the $2.2 billion crypto fund raised by Andreessen Horowitz in June. As of the end of Q4’21, the fund was fully deployed1. Proven fund managers have also increasingly taken the strong fundraising environment as an opportunity to leave larger VC firms in order to create their own niche funds.
Fintech poised to start seeing consolidation
VC investment in fintech remained quite strong in the US in Q4’21, led by a $735 million raise by embedded investing company DriveWealth. While areas like wealthtech and insurtech remain big ticket areas of VC investment, more developed subsectors — like digital banking — are beginning to get saturated. Digital banks are also seeing greater competition from traditional banks as they get smarter and embrace technologies to address their customers’ changing needs. The sector will likely start to see some consolidation as the larger digital banks thrive and others find themselves challenged to survive.
Exit activity in the US rises to major new height
Exit value in the US closed out 2021 almost three times higher than the previous peak of $289 billion seen in 2020, while the number of exits also reached a record high. While IPO activity is expected to remain high, the fervor for special purpose acquisition company (SPAC) transactions has continued to lessen as of Q4’21. Over the last quarter, a number of companies that were considering SPAC mergers have stepped back their plans, while others have decided to hold back going public until they are ready for a more traditional IPO.
Definition of cleantech evolving, driving more interest from VC investors
Over the past 12 months, the definition of cleantech in the US has evolved dramatically, moving far beyond the building of windmills and solar farms. In today’s investment environment, cleantech encompasses everything from software to measure and monitor emissions outputs to mechanisms to utilize resources more efficiently. These less capital-intensive forms of cleantech are generating significant interest from VC investors — both from a risk and a cost perspective.
This, combined with the increasing global consciousness for climate change, an enhanced willingness on the part of companies to invest in climate change solutions, and the range of climate-friendly initiatives included in the US’s Q4’21 infrastructure plan, will likely continue to drive cleantech interest heading into 2022. Longer term, the infrastructure plan in particular could also spur a new era of investment in highly innovative infrastructure solutions — like electrified roads.
Trends to watch for in 2022
VC investment in the US is expected to remain very strong in Q1’22, with areas like healthtech, B2B services, and cleantech gaining additional momentum. Proptech is also expected to see growing interest.
The IPO market in the US is also expected to remain robust, however, the number of IPOs could fall from 2021’s peak as companies increasingly focus on IPO quality and readiness over speed. One sector to watch in 2022 will be fintech; given the growing size and maturity of some US-based privately held fintechs, IPO exits could soon be on their horizon.
The reality is that companies are just starting to fully appreciate the difficulties associated with managing remote or hybrid workforces — and that’s on top of the challenges they already face attracting and retaining required talent in the first place. Companies able to simplify and help with different parts of the HR and people management process are going to be in high demand. This is no doubt going to lead to increasing VC investment in HRtech here in the US.
VC hits record $88.2 billion invested across 3536 deals
Annual median deal size for D+ rounds, hits $105 million
Fintechs pull in 4 of the largest 10 deals
Corporate VCs join in over $37 billion in Q4 — capping record year
Annual fundraising reaches new heights over $128 billion