Over the last decade, venture capital experienced exponential growth. This continued in 2020 despite the COVID pandemic, an economic recession, and a turbulent US election. The unprecedented crisis may have initially slowed down VC activity as the consumer landscape changed, but adaptation was rapid, and by the end of the year VC made a huge comeback. The pandemic actually fueled VC’s two main areas of investment—healthcare and technology, which both saw particularly significant growth in VC activity.
The State of the Venture Capital Industry
While the number of funds raised in 2020 declined sharply, the total capital raised increased by 30% to a record-breaking $73.6 billion. The number of first-time funds fell to a seven-year low, but the average fund size tripled. Capital invested across all stages was more than $156 billion—even more than the previous record of $120 billion invested during the dot-com craze of 2000.
Logistics, healthcare, fintech, and cloud computing all showed accelerated growth due to the pandemic, creating attractive investment opportunities and resulting in a record $152 billion in dry powder by the end of 2020. Increased market uncertainty caused capital to be concentrated within well-established VC incumbents. These traditional VC firms are now grappling with the increased market liquidity and the implications for returns.
Innovation Challenges Tradition in the Venture Capital Ecosystem
Today’s venture capital industry is a changing landscape, being reshaped by new emerging challenger VCs that are innovating in various ways to set themselves apart from traditional VC firms. Some are adopting artificial intelligence and machine learning to close deals or are taking advantage of global accelerators to drive their deal flow, while the growth of crowdfunding means that more investors are now participating in venture investing. Some VCs seek to increase the predictability of their returns by investing in broad and diversified portfolios of innovative startups, which may in turn end up challenging and disrupting established businesses.
To successfully disrupt the traditional VC firms, these challengers must leverage new technologies that are hard to reproduce and innovate with new business models that do not appeal to incumbents. Eventually, the traditional VC firms will have to respond adaptively to the competitive environment by investigating the non-traditional players around them in the venture capital ecosystem and improving their own technologies and business models so that they remain attractive to their founders and investors.
The Future of Venture Capital
Despite these initial signs of disruption, the traditional VC firms remain supremely powerful and are not in imminent danger. In the USA, 66% of total capital raised is handled by just 12% of the existing VCs, which are credible brands with proven track records. Startups and the entire VC pipeline actually benefit more from these established incumbents at the moment, and disruption takes time to evolve and mature. In the future of venture capital, both old and new VC firms will play their essential roles in funding innovative and promising business concepts, with the challengers presenting fierce competition.