Global venture capital funding reaches $125 billion

In Q1 2021, global venture capital funding reached $125 billion. This is an all time record for funding in a single quarter.

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Cristina Pellini
May 3, 2021 9:54 pm

The balance of power in venture capital and start-up team relations is shifting. I will outline two scenarios:

Scenario 1
A start-up team has a new idea. They feel the idea has a lot of potential and could be very successful 4 or 5 years down the line. To start with, they need to build a prototype of their product to see if the concept is viable. They try to cut costs to save as much money as possible. They take Amazon as a model of a company that tried to save costs, using doors to make desks. A time comes when the team is desperate for cash. Without venture capital funding, they could be out of business within months. The Founder sends emails, Tweets and LinkedIn messages to multiple VC firms, hoping that one will see potential in the company and invest.

Scenario 2
A start-up team has a new idea. Through connections and a well-crafted PR campaign, there’s a lot of buzz behind this start-up. The start-up hasn’t made a sale, nor has it generated any revenue. That doesn’t matter. The team hasn’t even approached one investor. Why? Because they don’t need to. Investors are clamoring to give money to the start-up, competing against other venture capital firms and other investors, hoping to be the ones to reap the rewards of possible unicorn growth.

Scenario 1 is the traditional model of venture capital and start-up team relations. The balance of power has almost always been with the venture capitalists. Now although Scenario 1 is still the dominant model, we are seeing a shift to Scenario 2. Start-up companies have traditionally competed against each other to secure funding. But now venture capital firms are competing against each other to give funding.

I see that Clubhouse has been mentioned. The buzz it generated resulted in a bidding war between two VC firms, Andreessen Horowitz and Benchmark, to give funding to Clubhouse. An enviable position to be in for any start-up. Andreessen Horowitz eventually won the bid using various persuasive tactics, including getting Kevin Hart to use the app!

Although not every start-up will have the buzz that Clubhouse has, start-up Founders are being encouraged to be more discerning with whom they allow to invest in their company. A strong shift away from taking money from the first investor who offers it. Founders should be doing their due diligence as well. What does the VC firm bring other than funding? Do they have good connections or experience funding a similar start-up? Speak to other start-ups and ask them about their experiences. Was the VC firm supportive? Would you recommend investment from this VC?

These questions are reflective of the venture capital – start-up shift. The power once resided with the one that held the money. But now funding is abundant, the highest it has ever been. The balance of power is become less lopsided and shifting towards high potential start-ups.

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Kotaro Shirai
May 1, 2021 3:00 pm

I have worked in venture capital in the past and I now do some seed investing. For me I feel a strong urge to invest in start ups, even more than before, because it feels the global economy is on the path to recovery with some boom years to come. Of course some countries are struggling with the pandemic still. India is going through a difficult period. We hope they can overcome the difficult situation soon. In Japan we are seeing rising cases ever since early March. But on the whole with vaccinations doing their work, there is a positive outlook from 2021 onwards.

I feel my urge to invest is linked to my passions, which have been neglected because of the global pandemic. I love to travel. I have a strong urge to visit other places, especially after not having visited another country since late 2019. When it comes to travel I am definitely not the only one who has been missing it. As such, I am inclined to invest in travel-related start-ups. If my prediction is correct that the travel industry will see a large rebound once restrictions are lifted, travel start-ups will be operating in the perfect environment for growth and successful exits.

I believe for individual investors providing capital, their funding is guided by an emotional deficit that they want to fulfil. In my case, my lack of travel makes me want to invest in travel start-ups. It takes me closer to my desire. Also from a common sense perspective I can be sure that if I miss traveling, other people will be feeling the same. This means there will be an abundance of people traveling when things open up and, importantly, an abundance of users that will be receptive to new travel products and services. Why is global venture capital at an all time high? Maybe because investors are following their gut.

Josef Lind
May 5, 2021 11:03 pm

It feels as if venture capital funding shouldn’t be high, let alone be the highest it has ever been. For some industries recovery could take years. Personally I am surprised to see funding at a staggering $125 billion but it is comforting to know that the world is optimistic. Jobs, industries and markets have all adapted to the ‘new normal’ and will continue to adapt in preparation for the post-pandemic world. Funding is adapting too.

Early-stage investing for start-ups isn’t the turf of venture capital firms anymore. quite rightly said that everyone wants to get in on the action. Private equity firms, hedge funds and even non-investment companies are getting into the venture capital game. Some are leveraging sophisticated technology, using AI models to assess whether a start-up is a good bet or not. This all contributes to a buoyant venture capital ecosystem where money, lots of it, flows freely.

But one aspect of venture capital funding has been lost because of the pandemic. Face-to-face meetings. VC investors have often relied on being good judges of character. They don’t always get it right, but interacting with founders and the start-up team is an integral part in deciding to invest. Sometimes you just have this hunch or gut feeling. You can sense that the team is hardworking and will go the extra mile even when things aren’t going great. To an extent this has been lost because interaction is now limited to Zoom calls.

How much of a gut feeling can you get from a Zoom call? It will be different for everyone. I would need much more interaction if I were an investor. But maybe this is why funding is so high. VC firms are relying less on their gut feelings and intuition, and instead are really focusing on analyses, trends, risk assessments. Their funding decisions are more calculated than before since the element of personal interaction is subdued. Perhaps such a high level of research and analysis is a confidence booster. I would be happy to invest if I had doubled down on my research and still saw the possibility for great returns. The pandemic, perhaps indirectly, has caused a surge in investing.

I was recently watching the Netflix documentary, Fyre Festival – a luxury festival in the Bahamas that charged tens of thousands of dollars to attend and was promoted by globally renowned influencers. It turned out to be a colossal failure, in part because the founder Billy McFarland was very adept at securing funding even when things were going horribly wrong. When money would run out, he would take a flight and come back a few days later with several million to keep things going. Investing in something like the Fyre Festival was always going to be risky because investors were investing in Billy. They weren’t investing in the Fyre Festival. Charisma was a big part of it, and they suffered because of the lack of due diligence.

Now things are different. It’s harder to be swayed by charisma on a Zoom call. Trusting in their data, research and predictive models, VC firms are experiencing a new level of non-intuitive investment decision-making.

Luis Ortiz
May 1, 2021 6:08 pm

With the spate of IPOs and acquisitions occurring, it is no surprise that everyone wants to get in on the action. Pouring money into the next potential unicorn can be alluring. The returns on investment in an early-stage company that is later acquired or goes public can be massive.

You know a company has potential when Instagram and Facebook try to clone it 🤣 Welcome Clubhouse to the scene; currently an invitation-only app available on the iOS App Store where people engage in live audio discussions. Last year Andreessen Horowitz, one of Silicon Valley’s staple VC firms, invested $12 million in Clubhouse (Source: Forbes). This was when there was little sign of widespread traction for the app. It still doesn’t have an official website other than http://www.joinclubhouse.com, which signposts visitors to Apple’s App Store. This pushed Clubhouse’s valuation to $100 million. Crunchbase now reports that Clubhouse has received $100 million in funding and is worth $1 billion. Unicorn status achieved! 🦄

Clubhouse’s story so far is reflective of the times. Huge amounts of venture capital flowing into tech companies, swelling their valuations into the hundreds of millions and even billions of dollars. If this reminds me of anything, it’s the dot com bubble. Let’s hope we don’t have a repeat of that.

While my above paragraph hints at recklessness, perhaps we have learned the lessons of the past. If we weren’t sure about internet tech in the late 90s, we are sure of it now. We have seen examples of unknown apps with little traction gain a large community of users within a short span of time. Rather than being the exception, this has happened over and over again. Start-up optimism is the name of the game right now. Clubhouse is just one of many unicorns making an impact in an ecosystem of software, e-commerce and financial services companies. I’m looking forward to seeing what new companies change our lives as venture capital flow into them 🙂

Jason Ng
May 3, 2021 9:57 am

The term ‘unicorn’ is not as unique as it once was. Before when I would hear the term, I would associate it with a startup company that grew at rapid pace and achieved a billion dollar valuation in record time. To my knowledge, this is still the definition of a unicorn – a privately held, pre-IPO startup that is worth over $1 billion. The difference is, before I could name a few unicorns here and there. Now unicorn success stories are growing.

Who’s seen a Grammarly ad? Almost every time I go on YouTube or check the difference between the US or UK spelling of a word, I see a Grammarly ad! Grammarly is a digital writing assistant. As is obvious with their name, it helps you with your grammar. A useful tool? Yes. A billion dollar tool? I didn’t think so at first. But Grammarly has indeed achieved unicorn status and is worth over $1 billion.

My reason for mentioning Grammarly is because my previous associations with unicorns were companies like Uber or SpaceX, not a virtual grammar assistant. But the reality is, if the simplest organisation in the world has potential and gets funding, they deserve their unicorn status. Unicorns are no longer the preserve of well-connected tech companies that happen to know a generous business angel. Global venture capital funding is at an all-time high with each funding round hoping to catapult the next unicorn.

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