The fourth quarter of 2020 was as busy as you imagined, with super-late-stage startups reaching new valuation thresholds at a record pace, and total venture capital funding in the United States recording its second-best result of all time.
That’s according to data released recently by CB Insights, which complements our look back at 2020’s venture capital year in America from yesterday.
At the time, we noted that American startups raised an average of $428 million each day last year, a sum that helps illustrate how rapid the private markets moved during the odd period.
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But a peek at aggregate results for the world’s largest VC market provides only part of the picture. We need to narrow our lens and peer more deeply into standout categories to understand how the U.S. venture capital market managed to post its biggest year ever in terms of dollars invested, despite seeing deal volume slip for a second consecutive year.
This morning, we’re scraping data together to better understand.
First, we want to see how unicorns performed in Q4 2020. This column noted in late December that it felt like unicorn creation was rapid in the quarter; how did that hold up?
Then we’ll dig into PitchBook data concerning the fintech sector, a huge recipient of venture capital time, attention and money.
Fintech’s 2020 is a good perspective to view both the year and its wild final quarter. So this morning, as America itself resets, let’s take a moment to understand last year just a little bit better as we get into this new one.
Unicorns
One of the most curious things about the unicorn era is the rising bet it represents. I’ve written about this before so I will be brief: Nearly every quarter, the number of unicorns — private companies worth $1 billion or more — goes up.
The private market is able to create more unicorns than it has been historically able to exit them.
Some of these companies exit, sometimes in group fashion. But, quarter after quarter, the number of unexited unicorns rises. This means that the bet on expected future liquidity from venture capitalists and other private investors keeps ratcheting higher.
Sure, you’re thinking, but so what? The public markets are hotter than Satan’s forge and no one knows what anything is worth!
That’s only true now; in time, the market could change. And unicorns that remain unexited could find themselves staring down the barrel of a market that suddenly doesn’t agree with their views of what their revenue should be worth.
So the risk — the wager — of the unicorn era rises over time as the number of unexited private companies worth $1 billion itself increases. And boy, did it do so in Q4.
Per CB Insights’ data, after expanding from 190 to just 206 from Q4 2019 to Q3 2020, the number of unexited U.S. unicorns rose to 225 in Q4 2020. That was on the back of 28 new unicorns being minted in the period, minus a good number of exits.
Unexited U.S. unicorns are now worth their all-time max as well: $659 billion.
As that figure works its way closer to a trillion dollars over time, I get more surprised. Surely at some point it has to start to descend? Given the historical pace of startup exits? It can’t just keep going up? Right?
In 2020, VCs invested $428M into US-based startups every day
Fintech
Fintech undergirded the unicorn boom that closed out 2020.
This isn’t to say that fintech was responsible for all the new unicorns we saw; it wasn’t. But the startup category’s 2020 data provides a delightful window into how we are managing to generate so much late-stage startup value.
Per PitchBook’s Q4 dive, U.S. fintech startups managed to raise $20.5 billion in 2020, a record. That as deal volume for the sector slipped from 1,031 in 2019 — a record — to 938 last year.
More dollars for fewer deals means larger rounds, right? Yep. Median and mean deal size for fintech startups in the U.S. rose to $4.7 million and $25 million in 2020, from $4 million and $18.3 million in 2019.
The average jumped so much thanks to huge late-stage fintech rounds; the very sort of investments that create unicorns.
For evidence of that we just have to observe how fintech valuations changed in 2020, compared to 2019. Per PitchBook data again, the median and mean fintech valuations for rounds last year skyrocketed. The median rose from 2019’s $20 million to $30 million in 2020, a 50% gain in a year. Average valuations for U.S. fintech startups raising new capital in 2020 rose from 2019’s $212.7 million to $460.7 million.
Call that the unicorn effect.
So what?
At some point the business cycle will turn and the public and private markets with it. Someday. But to paraphrase Aragorn, today is not that day.
What happened in Q4 was a fitting capstone to 2020, a year in which a pandemic and a recession failed to stop software’s march through the global economy, fueling a startup another chapter in a boom for the ages.
And 2021 is looking to kick off off right where 2020 ended.
This means that what we’ve generally seen in recent quarters — venture capital getting later, larger, and more concentrated — kept up in Q4 2020 and will likely continue in Q1 2021.
If you are a startup, the getting is still good, so go get the bag. If you are a VC, this is probably a great time to raise a new fund. And if you are an LP, well, interest rates aren’t going up any time soon, so your overall allocation to exotics might as well stay high by historical norms.
And around spins the cycle again.
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