VC Trends Show Market Maturity and a Likely Reversion to the Mean

San Francisco

Last week, PitchBook put out an article about 5 major trends they are seeing in Venture Capital (VC) markets.  A few of them, like deal volume and deal size dropping off we have spent some time on in the past.  But the two that stick out right now are the change in geographic dispersion, and who is participating even in today’s markets.  

First, geography.  One thing that should surprise no one, is that San Francisco, Los Angeles, New York, and Boston continue to be the 4 largest markets in the US for VC.  These cities are generally thought of as hubs for technology and healthcare as they boast some of the best colleges and universities in the world for training new, high-end workers. 

What may surprise some folks is that San Francisco and Boston have been losing market share for nearly a decade.  Cal Poly, MIT, and Harvard have not lost their fastball as it pertains to tech and healthcare startups.  In fact, quite the opposite, those schools have gotten better and better over the years at developing entrepreneurs and establishing funding for their best and brightest. 

But what this does tell us is that the venture capital community is maturing.  Have there been excesses?  Has there been too much concentration on particular industries?  The answer is obviously yes to both.  But the market share loss of VC dollars in Silicon Valley, and on Route 128 is happening as VC is expanding its reach, so the total dollars have been increasing in these geographies for years (even if this year is a major correction).  Market share gains in New York, Miami, and Philadelphia suggest to us that the reach of VC is expanding, and the types of businesses that are being invested in are broadening, as these cities are far more diverse from an industry perspective.  

Meanwhile, what is also interesting is how the venture market is constructed today.  For the better part of the last decade, asset managers and private equity investors have been increasing their allocations to venture capital.  This was on some level a nod to low interest rates, but more importantly, it was a recognition that higher returns were available in venture than they were in other places. 

There were distortions in market values that came with that as well.  But, what we find most interesting today, is that while asset managers and private equity investors have pulled back since the 2021 highs, corporate venture capital has poured money into the space.  With 64.1% of this year’s venture funding coming from corporate sponsors, we ask the question, who knows what businesses are worth in an exit better than the players that would eventually become the strategic buyer?  Do they know something that independent investment professionals don’t?  

The makeup of private markets is undergoing a major shift.  We fully expect a number of these trends to normalize.  For instance, we believe the asset managers and private equity investors will come back and continue to increase their share of venture capital markets. 

But at the same time, increased investment from corporate players and further diversity of investment are likely secular trends that we can expect to continue.  In either case, we’re excited for what’s ahead in these markets, and we can’t wait to see what innovations come next from tomorrow’s entrepreneurs. 

Source: PitchBook


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