Venture investments: driving innovation

Key takeaways

• Venture capital drives innovation and growth, shaping our future in terms of technological and wealth distribution impacts.
• While relatively small at $445 billion in 2022, VC funding generates trillions of dollars in economic activity.
• Venture investments can bring great returns and diversification benefits with low long-term correlation with public markets.

Introduction to venture capital

Venture capital refers to funding provided to startups in exchange for equity. It plays a crucial role in the growth and success of many now-leading companies, including Google, SpaceX, Starbucks, and even FedEx. The global trend of startups relying on venture capital is relatively recent, with most large public companies founded in the US and receiving venture capital at some point only after 1975. But it led to a massive increase in young innovative companies that can grow and succeed, leading to new products, services, and technologies. 

Insights:

• As of February 2023, there are over 600 unicorns globally, with the majority located in the United States.
• Venture-backed companies represent more than 40% of all US public companies founded after 1979, more than 50% of their market cap, and more than 80% of the R&D financing.
• Still, less than 0.2% of new companies get venture funding. Most companies just do not fit into the VC model.

The venture capital funding is relatively small, totaling $445 billion in 2022, but its economic impact is vast. It has helped many companies reach their full potential, creating millions of jobs and generating trillions of dollars in economic activity.

Not long ago, going public or getting acquired was the ultimate exit strategy for investors and founders. But now, companies are opting to stay private longer as private equity investments have become more flexible, faster, and easier to attract. 

Investment potential

Different stages of venture investment come with risks and rewards. Early funding rounds are riskier but offer higher returns, while later stages like series C, D, and further are less risky but offer lower returns. This diversity allows investors to choose the level of risk that suits them.

Insights for 2022:

• The top 3 funding were Epic Games - $2 billion, SpaceX - $1.7 billion, and Lineage Logistics - $1.7 billion. 
• SpaceX raised a round under the letter "N."
• Seed valuations remained high - 4$ million for angel and $12 million for seed pre-money valuation.

Overall, venture investments can bring great returns and diversification benefits. For the past 25 years, the CA US Venture Capital Index has averaged a return of 28.11%, while only 9.39% for S&P 500 Index. 

VC rapidly expands to other industries, including property tech, biotech, climate tech, intelligence, logistics, and alternative data. It drives innovation and growth, shaping our future.

Sources: Ilya Strebulaev, Cambridge Associates, Crunchbase, PitchBook.